16th Apr 2007 07:02
Aurora Russia Limited16 April 2007 16 April 2007 Aurora Russia Limited Maiden Preliminary Results 2006 Aurora Russia Limited ("Aurora Russia" or the "Company"), the AIM-quotedinvestment vehicle established to make equity or equity-related investments insmall and mid-sized private companies in Russia, today announces its maidenpreliminary results for the period from its incorporation on 22 February 2006 to31 December 2006 (the "period"). Operational highlights • First three investments since listing have been made: o £5.1 million acquisition of stake in OSG Records Management group of companies in July 2006 - Over 60% growth in revenues from $5 million in 2005 to over $8 million in 2006 o £12.5 million investment to launch Kreditmart, a mortgage and consumer finance broker in September 2006 - Opening of first branch in Russia and approval of first mortgage customers in March 2007 o £10.4 million investment in Unistream Bank, a money transfer business, announced in November 2006 - First part of acquisition completed on 13 April 2007 for £6.9 million - Unistream transferred approximately $1.84 billion in 2006 • The Manager is looking at a number of opportunities in the financial, business, and consumer services sectors Financial highlights • Net asset value as at 31 December 2006 £71.9 million, representing 95.9p per share • Cash and cash equivalents as at 31 December 2006 of £65.8 million • Net loss for the period of £321,000 • Diluted loss per share for the period 0.43p Commenting, Sir Trevor Chinn, Chairman of Aurora Russia, said: "We continue to be very positive about the prospects for the three investmentsmade to date. OSG is the largest records management operator in Russia and weexpect revenues to continue to grow at over 30% annually. Kreditmart, ourwholly owned mortgage and consumer finance company, has now opened its firstretail branch in Moscow and has approved its first customers. Unistreamcontinues to experience high growth and is now considered to be one of thelargest Russian money transfer businesses. "The growth of the Russian economy in 2006 showed no signs of abating with GDPgrowth estimated at 6.7 per cent. The Board is confident for the future as theManager has a number of potential transactions that it is currently evaluating." Enquiries: Aurora Russia LimitedJames Cook, Moscow +7 495 644 1662John McRoberts, London +44 (0) 20 7839 7112 Financial DynamicsEd Gascoigne-Pees +44 (0) 20 7269 7132Felicity Murdoch +44 (0) 20 7269 7243 Chairman's statement I am delighted to present Aurora Russia Limited's ('Aurora Russia' or the'Company') first annual report. The Company was incorporated in Guernsey on 22February 2006 and was admitted to trading on AIM on 24 March 2006, raising £75million (before expenses) through a placing of 75,000,000 ordinary shares at £1per share. These results reflect the period from incorporation on 22 February 2006 to 31December 2006. In this period, Aurora Russia recorded a net loss of £321,000 or0.43p per share. Administration and operating expenses predominantly related tothe Investment Management Fee. However, as required under IFRS, amortisation of£470,137 was charged in the period relating to the Investment Manager's option.This option has been independently valued at £3 million and will be amortisedover a period of five years. Initial administration and operating expenses of£303,000 incurred by Kreditmart have been charged in arriving at the result forthe period. At the end of the period the Company's net asset value was £71.9million or 95.9p per share, and the Company had cash available for investment of£43.5 million. Aurora Russia has an investment strategy of making equity and equity relatedinvestments in small and mid-sized private Russian companies, focused on thefinancial, business and consumer services sectors, where the Directors believethat there is potential for growth together with viable exit opportunities.Aurora Russia, advised by Aurora Investments Advisors Limited (the 'Manager'),has already successfully committed to three of the transactions outlined in itsAdmission Document and the Manager has a number of potential transactions thatit is currently evaluating. We continue to be very positive about the prospects for the three investmentsmade to date. OSG Records Management, the regional market leader in recordsmanagement, continues to grow its revenues at a strong pace in line withexpectations. Kreditmart, our wholly owned mortgage and consumer financecompany, has now opened its first retail branch in Moscow and has approved itsfirst mortgage customers. Unistream continues to experience high growth and isnow considered to be one of the largest Russian money transfer businesses. The growth of the Russian economy in 2006 showed no signs of abating with GDPgrowth estimated at 6.7 per cent. The Russian government continues with itseconomic reform agenda and has recently relaxed regulatory restraints to makeinvesting in the region easier. For example, in January 2006 the Central Bank ofRussia (CBR) relaxed the criteria required for foreign investors to be able tomake an investment in a Russian bank. As a direct result of this, Aurora Russiais able to make its initial investment in Unistream, a US$13.6 millioninvestment in new shares for a 17.7 per cent stake, earlier, as this did notneed CBR approval. A further investment, the purchase of an 8.3 per cent holdingfrom Uniastrum Bank, which will take Aurora Russia's stake to 26 per cent, issubject to CBR approval. Accounting Policy and Valuation Policy In a recent judgement the Financial Reporting Review Panel has enforced therequirement that investments held for resale be consolidated when the holding isgreater than 50 per cent. Therefore, Aurora Russia's results consolidate thoseof Kreditmart and it is anticipated that any future investment resulting inAurora Russia holding a controlling stake will be consolidated. Whitebrooks (OSG's parent company) is held as an investment at cost. If theCompany's valuation committee concludes that that the value of Whitebrooks,Unistream or any other minority investment has appreciated, then an adjustmentwill be made to the holding value of such investment, with the resultingincrease recorded as an investment gain in the Income Statement. Hedging policy The Board has decided to hedge the Company's foreign currency exposure on itsinvestments and, in the period to date, this has been achieved through the useof forward exchange contracts. Any profits or losses on such contracts are takento the Income Statement and are offset against currency fluctuations in thevaluation of the underlying investments. Change of Accounting Reference Date The Board, having reviewed the current reporting arrangements, has concludedthat it is in the best interests of the Company to change its accountingreference date from 31 December to 31 March in order to allow its investeecompanies more time to provide their audited financial statements. Therefore,the next audited financial statements of Aurora Russia will be for the 15 monthperiod to 31 March 2008. In this transitional period the Company will issueunaudited interim results for the 6 months to 30 June 2007 and also for the yearto 31 December 2007. Directorate Changes The Directors were delighted to welcome Christopher Cowan to the board on 9February 2007. Chris brings with him over 40 years experience working forinternational companies in a finance role which includes over 13 years acting asa group finance director. As a Non Executive Director of Aurora Russia, Chriswill chair the Valuation Committee and sit on the Audit Committee. Cowasji Magol left the board on 9 February 2007 and I would like to take thisopportunity to thank him for his contribution both during and since the IPO ofthe Company. Outlook We expect the next twelve months to be an extremely interesting period forRussia, with Duma elections in December followed by the Presidential electionsin March 2008. There may well be some uncertainty in the market as a result ofthese political events but the business community in Russia anticipates that theeconomic reform policies will continue irrespective of who is elected asPresident. The Board is confident that Aurora Russia will continue to provide its investorswith exposure to quality growth companies in the financial, business andconsumer services sectors. Sir Trevor Chinn Chairman of the BoardAurora Russia Limited Investment Manager's report We are delighted to report that since Aurora Russia's admission to AIM, we havebeen successful in making investments in three of the four companies highlightedin its Admission Document; OSG Records Management, Kreditmart and Unistream. These three businesses have enormous potential for growth. OSG Records Management remains the dominant market leader in Russia. Whilst theRussian formal records management market is developing very quickly, in our viewit is still in its infancy and may be as little as 1 per cent of its potentialsize. The Russian mortgage market continues to grow exponentially. With a strongfoundation of existing lien-free home equity as a result of the privatisation ofhousing, Russia has a solid platform for continued growth in this sector.Russian GDP in 2006 was approximately US$1,011 billion and mortgage lending inthe year was therefore less than 1 per cent of GDP. According to Alfa Bank,Russia's largest private bank, the mortgage market is expected to more thandouble in 2007 to approximately US$17 billion by the year end. We believe thatthrough Kreditmart, Aurora Russia is well-positioned to capture its share ofthis growth while providing affordable housing and consumer finance solutions toRussia's emerging middle class. The Russian money transfer market is showing extremely high rates of growth.Whilst the global money transfer market doubled to US$260 billion between 2002and 2006, a recent report from the World Bank, based on statistics from the CBR,estimates that Russian outbound remittances almost doubled to US$6 billionbetween 2005 and 2006, and that Russian inbound transfers grew 25 per cent toUS$1 .3billion over the same period. Although there are no reliable statisticson intra-Russia remittances, experts estimate it at approximately US$8 billionand growing at double-digit rates. All combined, Russia is one of the fastestgrowing money transfer regions in the world - an opportunity on which Unistreamis well positioned to capitalise. We are encouraged by the macroeconomic indicators for the Russian economy, whichcontinues to show sustained expansion, an annual GDP growth of in excess of sixper cent, growing reserves, repayment of the Paris Club debt, and lower domesticinterest rates. The sectors in which we are investing are well positioned tobenefit directly from these factors. Russia has a strong foundation forcontinued growth in 2007. Investment in OSG Records Management On 24 July 2006, Aurora Russia made its first investment paying US$9.4 million(£5.1 million) for 40.31 per cent (37.1 per cent on a fully diluted basis) ofthe common shares of Whitebrooks, the parent company of the OSG RecordsManagement Group. Aurora Russia also provided the company with a US$5 millionshort-term convertible working capital facility of which US$1.6 million has sofar been drawn down by the company. OSG Records Management is the largest operator in Russia (the majority of itsbusiness is in Russia), Ukraine and Kazakhstan, and is considered the regionalmarket leader in records management, providing cost-effective total recordsmanagement, document storage, data security and confidential data destructionsolutions. OSG Records Management also has a presence in Poland, Bulgaria, Chinaand Turkey. Its 2006 revenues were in excess of US$8 million compared with just under US$5million in 2005. We anticipate that revenues will continue to grow at an annualrate of over 30 per cent. Investment in Kreditmart On 22 September, we committed £12.5 million to launch Kreditmart, a wholly ownedfinance company distributing mortgages, equity release loans and other consumerfinance products. The company has a strong management team which comes from theleading mortgage and consumer finance institutions in Russia and the companycurrently employs 38 people. Kreditmart plans to open 10 loan shops operating inseven regions across Russia by the end of 2007 and to build a book of mortgageassets. According to plan Kreditmart has opened its head office, its first loanshop in Moscow and has approved its first mortgage customers. It plans to openits next loan shop in St Petersburg in May 2007. James Cook, director of Aurora Russia and previously Chairman and CEO of GEConsumer Finance in Russia, provides hands on operational support to the Companyon a daily basis. James' track record includes the successful launch androll-out of Russia's first mortgage bank, DeltaCredit (sold to Societe Generalein 2005), and DeltaBank, Russia's leading issuer of VISA credit cards (sold toGE Consumer Finance in 2004). Investment in Unistream On 30 November, Aurora Russia signed an agreement to invest US$20 million for a26 per cent stake in Unistream Bank, a leading money transfer business inRussia. The investment will be used to roll out up to 550 money transfer cashdesks over the next few years. Management accounts show that in 2006 Unistreamtransferred approximately US$1.84 billion making it one of the largest domesticRussian money transfer companies. Aurora Russia is in the process of investingUS$13.6 million into the company in return for a 17.7 per cent stake. Once theapproval of the CBR has been received for Aurora Russia to own more than 20% ofa Russian bank, the Company will purchase an additional 8.3 per cent holdingfrom Uniastrum Bank, the founder of Unistream, for US$6.4 million, therebybringing its shareholding to 26 per cent. Unistream continues to grow very quickly, capitalising on high rates ofmigration from the surrounding regions and the CIS to Moscow and by increasingits share of the market primarily through an aggressive pricing policy andadvertising programme. We expect 2007 to continue to bring good investment opportunities as we continueto build our pipeline of potential transactions. John McRoberts and James Cook Aurora Investment Advisors Limited Consolidated Income Statement For the period from incorporation on 22 February 2006 to 31 December 2006 Notes £'000 Administration and operating expenses 3 (2,689)Unrealised loss on revaluation of investments 7 (272)Net exchange gains 179 Operating loss (2,782) Bank interest receivable 2,459Loan interest receivable 2 Finance income 2,461 Net loss for the period 15 (321) Loss per share - Basic 4 (0.43p) Loss per share - Diluted 4 (0.43p) All items in the above statement derive from continuing operations. All income is attributable to the equity holders of the parent company. Thereare no minority interests. The accompanying notes on pages 11 to 23 form an integral part of thesefinancial statements. Consolidated Balance Sheet As at 31 December 2006 Notes £'000Non-current assetsPlant and equipment 5 3Investments - at fair value through profit and loss 7 15,401Loan receivable 7 563 15,967Current assets Trade and other receivables 8 274Cash and cash equivalents 65,778 66,052 Total assets 82,019 Current liabilitiesDerivative financial liabilities 9 8Trade and other payables 10 10,362 Total liabilities 10,370 Total net assets 71,649 EquityShare capital 11 750Share premium 12 -Special reserve 13 70,750Share options reserve 14 470Revenue reserve - deficit 15 (321) Total equity 71,649 Net asset value per share - Basic 16 95.5p The accounts on pages 6 to 23 were approved by the Board of Directors on 4 April2007 and signed on its behalf by: Director DirectorStephen Coe Sir Trevor Chinn The accompanying notes on pages 11 to 23 form an integral part of thesefinancial statements. Company Balance Sheet As at 31 December 2006 Notes £'000Non-current assetsInvestment in subsidiary - at fair value through profit and loss 6 12,500Investments - at fair value through profit and loss 7 15,401Loan receivable 7 563 28,464Current assetsTrade and other receivables 8 153Cash and cash equivalents 63,850 64,003 Total assets 92,467 Current liabilitiesDerivative financial liabilities 9 8Trade and other payables 10 20,512 Total liabilities 20,520 Total net assets 71,947 EquityShare capital 11 750Share premium 12 -Special reserve 13 70,750Share options reserve 14 470Revenue reserve - deficit 15 (23) Total equity 71,947 Net asset value per share - Basic 16 95.9p The accounts on pages 6 to 23 were approved by the Board of Directors on 4 April2007 and signed on its behalf by: Director DirectorStephen Coe Sir Trevor Chinn The accompanying notes on pages 11 to 23 form an integral part of thesefinancial statements. Consolidated Statement of Changes in Equity For the period from incorporation on 22 February 2006 to 31 December 2006 Notes Share Share Special Revenue Share Total Capital Premium Reserve Reserve Options Reserve £'000 £'000 £'000 £'000 £'000 £'000 Issue of ordinary share 11, 12 750 70,750 71,500capital, net of issuecosts Conversion of share 12, 13 (70,750) 70,750 -premium account Net loss for the period 15 (321) (321) Recognition in respect of 17 470 470share-based payments At 31 December 2006 750 - 70,750 (321) 470 71,649 The accompanying notes on pages 11 to 23 form an integral part of thesefinancial statements. Consolidated Cash Flow Statement For the period from incorporation on 22 February 2006 to 31 December 2006 Notes £'000Cash flows from operating activitiesOperating loss (2,782)Adjustments for:Increase in operating trade and other receivables (157)Increase in operating trade and other payables 122Revaluation of investments 272Recognised share based payments 470Derivative financial liability 8 Net cash outflow from operating activities (2,067) Cash flows from investing activitiesAcquisition of investments (5,464)Acquisition of fixed assets 5 (3)Loan advanced (562)Bank interest received 2,374 Net cash outflow from investing activities (3,655) Cash flows from financing activitiesProceeds from issue of ordinary share capital 11 75,000Issue costs 12 (3,500) Net cash inflow from financing activities 71,500 Net increase in cash and cash equivalents 65,778 Opening cash and cash equivalents - Closing cash and cash equivalents 65,778 The accompanying notes on pages 11 to 23 form an integral part of thesefinancial statements. Notes to the Financial Statements For the period from incorporation on 22 February 2006 to 31 December 2006 1. General information Aurora Russia Limited ('the Company') was incorporated in Guernsey on 22February 2006, and was listed on AIM on 24 March 2006. The Company wasestablished to acquire interests in small and mid-sized private companies inRussia, focusing on the financial, business and consumer services sectors. 2. Accounting Policies Basis of preparation The financial statements are prepared in accordance with International FinancialReporting Standards ('IFRS'), which comprise standards and interpretationsapproved by the International Accounting Standards Board and InternationalAccounting Standards and Standing Interpretations Committee interpretationsapproved by the International Accounting Standards Committee that remain ineffect and applicable legal and regulatory requirements of Guernsey Law and ofAIM. The financial statements do not include a company Income Statement as in theopinion of the Directors this would not be materially different from theconsolidated Income Statement. The financial statements have been prepared on the historical cost basismodified by the revaluation of investments and financial instruments. Theprincipal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and any entities controlled by the Company (its subsidiaries) madeup to 31 December each year. Control is achieved where the Company has the powerto govern the financial and operating policies of an investee entity so as toobtain benefits from its activities. On acquisition the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair values of the identifiable net assets acquired (iediscount on acquisition) is credited to the income statement in the period ofacquisition. The results of subsidiaries acquired or disposed of during the period areincluded in the consolidated income statement from the effective date ofacquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe Group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Functional and presentation currencies The Directors have selected sterling as the presentation currency of theCompany. The Directors have also selected sterling as the Company's functionalcurrency, as the Company is listed on AIM and has received and provided all itsfunding in that currency. The majority of the Company's investments are expectedto be denominated in US dollars or Russian roubles. Income Interest income is accrued on a time basis. Dividend income from investments is recognised when the Company's right toreceive payment has been established, normally the ex-dividend date. Expenses All expenses are accounted for on an accruals basis and are presented as revenueitems, except for expenses that are incidental to the disposal of an investment,which are deducted from the disposal proceeds, and certain set up expenses (seenote below). Segmental reporting The Directors are of the opinion that the Group is engaged in a single segmentof business being investment business and in one geographical area, Russia. Taxation The Company is exempt from Guernsey taxation on income derived outside Guernseyand bank interest earned in Guernsey under the Income Tax (Exempt Bodies)(Guernsey) Ordinance 1989, for which it pays an annual fee of £600. The Group is liable to Russian tax arising on its activities in Russia. The Group is liable to Cypriot tax arising on the activities of its Cypriotsubsidiary. The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the period. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income and expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries, except where the Group is able tocontrol the reversal of the temporary difference and it is probable that thetemporary difference will not reverse in the foreseeable future. Foreign currency transactions Transactions in currencies other than sterling are translated at the foreignexchange rate ruling at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies at the balance sheet date aretranslated into sterling at the exchange rate ruling at that date. Foreignexchange differences arising on translation are recognised in the IncomeStatement. Non-monetary assets and liabilities that are measured in terms ofhistorical cost in a foreign currency are translated using the exchange rate atthe date of the transaction. Non-monetary assets and liabilities denominated inforeign currencies that are stated at fair value are translated into sterling atforeign exchange rates ruling at the dates the fair value was determined. On consolidation, the assets and liabilities of the Group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expenses are translated at the average exchange rates for the period unlessexchange rates fluctuate significantly. Exchange differences arising, if any,are classified as equity and transferred to the Group's translation reserve.Such translation differences are recognised as income or expenses in the periodin which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the rate prevailing on the balance sheet date. Forward exchange contracts The Group's activities expose it to financial risks of changes in foreigncurrency exchange rates. The Group uses forward foreign exchange contracts tohedge these exposures, and not for speculative purposes. At the balance sheetdate outstanding forward exchange contracts are measured at their marked tomarket price, and are included in the financial statements as either aderivative asset or liability. Gains or losses arising on forward foreignexchange contracts are taken to the Income Statement. Financial Instruments Financial assets and financial liabilities are recognised on the Group's balancesheet when the Group becomes a party to the contractual provisions of theinstrument, including unconditional commitments to make investments. The Groupshall offset financial assets and liabilities if the Group has a legallyenforceable right to set off the recognised amounts and interests and intends tosettle on a net basis. Investments Investments, including investments in subsidiaries, are designated as fair valuethrough profit and loss. Investments are initially recognised at cost on a tradedate basis. The investments are subsequently re-measured at fair value, which isdetermined by the Directors on the recommendation of the Valuation Committee.Unrealised gains or losses arising from the revaluation of investments are takendirectly to the Income Statement, together with any gains or losses on forwardforeign exchange contracts designed to hedge the currency exposure related tothose investments. Investments deemed to be denominated in a foreign currencyare revalued in sterling terms even if there is no revaluation of the investmentin its currency of denomination. The fair value of the investments is arrived at on the basis of therecommendation of the Company's Valuation Committee. Fair value is determined bythe Valuation Committee as follows: Unquoted securities are valued based on the realisation value which is estimatedby the Committee with prudence and good faith. The Committee will take intoaccount the guidelines and principals for valuation of Portfolio Companies setout by the European Venture Capital Association (EVCA), with particularconsideration of the following factors: • Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction • In estimating fair value for an investment, the Committee will apply a methodology that is appropriate in the light of the nature, facts and circumstances of the investment and its materiality in the context of the total investment portfolio and will use reasonable assumptions and estimations. • An appropriate methodology incorporates available information about all factors that are likely materially to affect the fair value of the investment. The valuation methodologies are applied consistently from period to period, except where a change would result in a better estimate of fair value. Any changes in valuation methodologies will be clearly disclosed in the financial statements. The most widely used methodologies are listed below. In assessing whichmethodology is appropriate, the Committee is predisposed towards thosemethodologies that draw upon market-based measures of risk and return. • Cost of recent investment • Earnings multiple • Net assets • Available market prices Cash and cash equivalents Cash in banks and short term deposits that are held to maturity are carried atcost. Cash and cash equivalents consist of cash in hand and short term depositsin banks with an original maturity of three months or less. Trade receivables Trade receivables do not carry any interest and are short-term in nature. Theyare accordingly stated at their nominal value as reduced by appropriateallowances for estimated irrecoverable amounts. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Financial liabilities and equity Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangement entered into. An equity instrument isany contract that evidences a residual interest in the assets of the Group afterdeducting all of its liabilities. Financial liabilities and equity instrumentsare recorded at the proceeds received, net of issue costs. Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event, and it is probablethat an outflow of economic benefits will be required to settle the obligation,and the obligation can be reliably measured. If the effect is material,provisions are determined by discounting the expected future cash flows at apre-tax rate that reflects current market assessments of the time value of moneyand, where appropriate, the risks specific to the liability. Set up expenses The preliminary expenses of the Company directly attributable to the Offer andcosts associated with the establishment of the Company that would otherwise havebeen avoided are taken to the share premium account. Share based payments Share options granted to the manager in respect of ongoing services areconditional upon the achievement of certain performance conditions. The share options have been valued by an independent valuer in the financialstatements as at the date the options were granted. The resulting value isamortised in the Income Statement over the expected life of the options. Theoptions may have a dilutive effect upon the earnings per share and the net assetvalue of the Company and the Group. Use of estimates The preparation of the Group's financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities and contingencies at the time of the Group's financial statements,and revenue and expenses during the reporting period. Actual results coulddiffer from those estimated. Significant estimates in the Group's financialstatements include the amounts recorded for the fair value of the investments.By their nature, these estimates and assumptions are subject to measurementuncertainty and the effect on the Group's financial statements of changes inestimates in future periods could be significant. Standards, interpretations and amendments to published statements not yeteffective Certain new standards, interpretations and amendments to existing standards havebeen published that are mandatory for the Group's accounting policies forperiods beginning on or after 1 January 2007 but which the Group has not earlyadopted. These are: • IFRS 7, Financial Instruments: Disclosures; and • Complementary amendment to IAS 1, presentation of Financial Statements - Capital Disclosures IFRS 7 introduces new disclosures to improve the information about financialinstruments. It requires the disclosure of qualitative and quantitativeinformation about exposure to risks arising from financial instruments,including specified minimum disclosures about credit risk, liquidity risk andmarket risk, including sensitivity analysis to these risks. It replacesdisclosure requirements in IAS 32, Financial Instruments: Disclosure andPresentation. It is applicable to all entities that report under IFRS. Theamendment to IAS 1 introduces disclosures about the level of an entity's capitaland how it manages capital. The directors have assessed the impact of IFRS 7 andthe amendment to IAS 1 and concluded that the main additional disclosures willbe the sensitivity analysis to these risks. The Group will apply IFRS 7 and theamendment to IAS 1 from annual periods beginning 1 January 2007. The impact ofall other Standards and Interpretations not yet adopted is not expected to bematerial. 3. Administration and operating expenses The net loss for the period has been arrived at after charging the followingitems of expenditure: £'000 Investment management fee 1,500Auditors' remuneration - Company 32Auditors' remuneration - Kreditmart 10Directors' remuneration 135Share based payments 470Other operating and administrative expenses - Company 249Other operating and administrative expenses - Kreditmart 293 2,689 Auditors' remuneration relates entirely to the provision of audit services. Inaddition Deloitte & Touche LLP earned the following fees during the period: £'000 Reporting accountants' fees 60Consultancy fees 15 75 Reporting accountants' fees related to the set up of the Company and accordinglywere charged against the Company's share premium account (see note 12). Consultancy fees related to the set up of the Company's subsidiary KreditmartFinance Limited and have been capitalised. 4. Earnings per share £'000The calculation of the basic and diluted earnings per share is based on the following data: Loss for the purposes of basic and diluted loss per share being net loss attributable to equity (321)holders of the parent Weighted average number of ordinary shares for the purpose of basic loss per share: 75,000,000 Effect of dilutive potential ordinary shares:Options - Weighted average number of ordinary shares for the purpose of diluted loss per share: 75,000,000 5. Plant and equipment Plant and equipment £'000 Cost:Additions 3 At 31 December 2006 3 Net book value: At 31 December 2006 3 The assets were purchased in December 2006 and will be depreciated with effectfrom 1 January 2007. As a result there is no depreciation charge for the period. The useful lives of the assets are estimated as follows: Plant and equipment 3 years 6. Investment in subsidiary - at fair value through profit and loss The financial statements of the Group consolidate the results, assets andliabilities of the subsidiary companies listed below: Name of subsidiary undertaking Country of Class of % of class Principal incorporation share held activity Kreditmart Finance Limited Cyprus Ordinary 100.0% Consumer finance The investment in Kreditmart Finance Limited ('KFL') was approved by the Boardon 11 September 2006. KFL was incorporated and acquired by the Company on 19September 2006. A total of £12,500,000 was committed to set up and fund theestablishment of the company. At the balance sheet date a total of £2,333,332had been drawn down from this commitment. 7. Investments - at fair value through profit and loss £'000 £'000 £'000 Fair value Cost Unrealised gain/(loss) Whitebrooks Investments Limited 5,036 5,308 (272) Unistream Bank 10,365 10,365 - 15,401 15,673 (272) The investment in Whitebrooks Investments Limited ('WIL') was completed on 24July 2006. The Company acquired a 40.3% stake in WIL, diluted to 37.1% after theagreement of a management option scheme. The precise percentage of the stakewill vary dependent on the reported revenue of WIL for the year ended 31December 2006. On 27 November 2006 the Board approved the purchase of a 26% stake in UnistreamBank ('UB') at a cost of US$20 million, subsequent to which conditionalagreements were signed on 30 November 2006. The proposed deal was announced toAIM on 30 November 2006. As at the balance sheet date, however, the conditionshad not yet been fully satisfied and no funds had been paid out. As a result of the size of the stakes in these two companies, WIL and UB couldpotentially qualify as associated companies, which would normally require thatthey be equity accounted in the books of the Company. However, the Company hastaken advantage of the exemption available to it under IAS 28, and henceaccounts for these as investments at fair value through profit and loss. In the view of the Valuation Committee, insufficient time has elapsed from theacquisition of the investments to permit any meaningful upwards revaluation ofthe investments. There are no factors of which the Committee is aware that wouldlead it to value the investments at less than cost price in their currency ofdenomination. The unrealised loss on the investment in Whitebrooks Investments Limited arisesdue to a revaluation in sterling terms of the US dollar cost of the investment. In addition to its investment in the shares of Whitebrooks Investments Limited,the Company agreed on 24 July 2006 to provide the investee company with a loanfacility of US$5 million. The drawn down amount of the loan is repayable on orbefore 22 December 2007, however it is likely that any amounts still outstandingat maturity would be rolled over for a further period. In the event of defaultthe loan is convertible into ordinary shares of the borrower. The outstanding balance as at 31 December 2006 was as follows: US$'000 £'000Loan drawn down plus capitalised interest 1,103 563 8. Trade and other receivables Company Group £'000 £'000 Sundry debtors and prepayments 11 132Bank interest receivable 86 86Amount receivable from related party 56 56 153 274 The related party balance is due from Aurora Investment Advisors Limited, and isinterest free, unsecured and repayable on demand. This balance has since beenrepaid. 9. Derivative financial liabilities The Group utilises forward foreign exchange contracts to hedge its exposure tomovements in exchange rates. At the balance sheet date the fair value ofunsettled forward foreign exchange contracts for the Group and the Company was aliability of £8,383. The following contracts were open at the Balance Sheet date (Group and Company): - Sell US$ 9,732,178.09 at 1.96046 to buy £4,964,231.91 for value 29 June 2007; Sell US$ 1,100,000.00 at 1.9665 to buy £559,369.44 for value 29 June 2007. 10. Trade and other payables Company Group £'000 £'000 Kreditmart Finance Limited - undrawn investment commitment 10,166 -Unistream Bank - undrawn investment commitment 10,214 10,214Expense accruals 132 148 20,512 10,362 11. Share capital £'000Authorised share capital:200,000,000 ordinary shares of 1p each: 2,000 Issued share capital:75,000,000 fully paid ordinary shares of 1 p each: 750 The Company has one class of ordinary shares which carry no right to fixedincome. 2 shares were issued on 24 February 2006 for a consideration of £1 each. 74,999,998 shares were issued on 20 March 2006 for a cash consideration of £1each. 12. Share premium Company Group £'000 £'000 Premium arising on issue of ordinary shares 74,250 74,250Transaction costs on issue of ordinary shares (3,500) (3,500)Conversion to special distributable reserve (70,750) (70,750) Balance as at 31 December 2006 - - On 5 April 2006 the Royal Court of Guernsey confirmed the reduction of thecapital by way of cancellation of the Company's share premium account. Theamount cancelled has been credited to a Special reserve (see note 13). 13. Special reserve Company Group £'000 £'000 On conversion from share premium 70,750 70,750 Balance as at 31 December 2006 70,750 70,750 The Special reserve is a distributable reserve to be used for all purposespermitted under Guernsey company law, including the buy back of shares and thepayment of dividends. 14. Share options reserve Company Group £'000 £'000 Recognised fair value of share options issued during the period 470 470 470 470 Details of share-based payments in the period are shown in note 17. 15. Revenue reserve - deficit Company Group £'000 £'000 Net loss for the period (23) (321) Balance as at 31 December 2006 (23) (321) Any surplus or deficit arising from net profits or losses after payment ofdividends is taken to this reserve. 16. Net asset value per share Company Group Net asset value £71,947,000 £71,649,000 Number of shares in issue 75,000,000 75,000,000 Net asset value per share 95.9p 95.5p 17. Share based payments Terms The Company has granted an option to the Manager to subscribe for ordinaryshares representing 20% of the issued share capital of the Company after theexercise of the Manager option at the placing price per ordinary share (subjectto adjustments for any dividends per share paid by the Company prior to exerciseby the Manager); provided that the total shareholder return on the ordinaryshares as compared to the placing price has increased by at least 12% per annumfrom the date of admission until exercise measured by reference to the averageof the closing mid-market prices of the ordinary shares in the three monthsprior to the date on which the Manager option becomes exercisable (the 'hurdlerate') and, provided further that if any additional ordinary shares are issuedfollowing admission as part of any secondary fundraising, the exercise price ofthe Manager option in respect of such additional shares shall be the issue pricepaid for such shares pursuant to such secondary fundraising (subject toadjustments for any dividends per share paid by the Company prior to exercise bythe Manager). The Manager option is exercisable at any time during the periodbetween the third and tenth anniversaries of the date of admission; providedthat the hurdle rate has been met prior to the date of exercise of the Manageroption. The Manager option shall also become exercisable at any time between thedate of admission and the tenth anniversary thereof in the event of a takeoverof the Company or the Company's liquidation. In such circumstances, the Managerdoes not need to satisfy the hurdle rate in order to exercise the Manageroption. Change in the period Number Exercise price Options granted during the period 18,750,000 100p Outstanding at the end of the period 18,750,000 Exercisable options at the end of the period - The options outstanding at 31 December 2006 had a remaining contractual life of9 years 3 months. Calculation of the fair value of equity settled share based payments All share based payments have been valued using the Monte Carlo model. The keyinputs to this model that drive the option value are: Share price at grant of options 100pExercise price 100pExpected volatility 20%Risk free rate 4.39%Effective dividend yield 0% Based on the above valuation the total value of the options granted at the dateof grant was £3,000,000. The directors have estimated that the hurdle rate will be achieved, and hencethe options will vest, after 5 years. The value of the options will be chargedto the income statement on a pro rata basis over the course of the 5 yearsending 20 March 2011. The charge arising for the period ended 31 December 2006is £470,137. 18. Financial risk factors Liquidity risk The Company has yet to invest the majority of the funds raised from its listing,and as a result has a high level of cash and cash equivalents at the balancesheet date. The cash and cash equivalents are placed with financial institutionson a range of terms, from call to 6 months notice. Credit risk The Company is exposed to credit risk in respect of its cash and cashequivalents, arising from possible default of the relevant counterparty, with amaximum exposure equal to the carrying value of those assets. The credit risk onliquid funds is limited because the counterparties are banks with highcredit-ratings assigned by international credit-rating agencies. The Companymonitors the placement of cash balances on an ongoing basis. The Company is also exposed to credit risk in respect of the loans granted toWhitebrooks Investments Limited, with a maximum exposure equal to the value ofthe loans advanced. Under the terms of the loan agreement, should the loans notbe repaid by the maturity date, they are converted into ordinary shares of theborrower. Currency risk Currency risk is the risk that the value of financial instruments will fluctuatedue to changes in foreign exchange rates. Currency risk arises when futurecommercial transactions and recognised assets and liabilities are denominated ina currency that is not the Company's reporting currency. The Company is exposedto foreign exchange risk arising from various currency exposures primarily withrespect to US Dollars and the Russian Rouble. In particular the Company'sinvestment in Whitebrook Investments Limited has been made in US Dollars. TheCompany has put in place hedging arrangements to mitigate its US Dollar exposureand to neutralise the impact of currency fluctuations for sterling investors.The Company does not use such currency derivatives for speculative purposes. An analysis of the Group's net currency exposure is as follows: Currency of denomination Sterling US Dollars Russian Total Roubles £'000 £'000 £'000 £'000 Total assets 76,283 5,599 137 82,019Total liabilities (10,370) - - (10,370)Off balance sheet assets 5,524 - - 5,524Off balance sheet liabilities - (5,524) - (5,524) Net currency exposure 71,437 75 137 71,649 Market risk Market price risk arises principally from uncertainty concerning future valuesof financial instruments used in the Group's operations. It represents thepotential loss the Group might suffer through holding interests in unquotedprivate companies whose value may fluctuate and which may be difficult to valueand/or to realise. The Company seeks to mitigate such risk by assessing suchrisks as part of the due diligence process related to all potential investments,and by establishing a clear exit strategy for all potential investments. Interest rate risk The Group is subject to risks associated with changes in interest rates inrespect of interest earned on its cash balances. The Group seeks to mitigatethis risk by monitoring the placement of cash balances on an ongoing basis inorder to maximise the interest rates obtained. 19. Events after the balance sheet date On 5 March 2007 the Company advanced a further loan of US$500,000 to WhitebrooksInvestments Limited under the terms of the loan facility agreed on 24 July 2006 20. Related party transactions Transactions between the Company and any subsidiaries which are related partieshave been eliminated on consolidation and are not disclosed in this note. John McRoberts and James Cook each hold 47.5% of the ordinary share capital and42.5% of the non-voting preference share capital of Aurora Investment AdvisorsLimited ('AIAL'). A trust created by Sir Trevor Chinn (in which he has nointerest) holds 10% of the non-voting preference shares in AIAL. AIAL receives a fee for its services as investment manager and advisor. Thetotal charge to the Income Statement during the period was £1,500,000. During the period the Company has paid certain expenses which have subsequentlybeen determined to be chargeable to AIAL. As a result there is a balance duefrom AIAL at the balance sheet date in the sum of £55,785. This balance hassince been repaid. The Company pays fees to Investec Administration Services Limited ('IASL') forits services as administrator. The total charge to the Income Statement duringthe period was £67,010, of which £18,750 was outstanding at the period end.Steve Coe, a director of the Company, is also a director of IASL. The directors of the Company received fees for their services, details of whichare provided in the Directors' Report. The total charge to the Income Statementduring the period was £118,205, of which £34,167 was outstanding at the periodend. Other director related party transactions are provided in the Directors'Report. On 17 July 2006, John McRoberts exercised options in respect of 152 shares inWhitebrooks Investments Limited ('WIL') at an average price of US$275 per share.The options were granted to Mr McRoberts by an unrelated shareholder in WIL inconnection with consultancy work performed for the shareholders of WIL during2004 and early 2005. Mr McRoberts still holds options in respect of a further848 shares at an average price of US$275 granted by Tim Slesinger, the largestshareholder in WIL. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Aurrigo