RNS Number:3486Q
Real Affinity PLC
30 September 2003
Real Affinity plc
Final results for the year ended 31 March 2003
CHAIRMAN'S STATEMENT
This has been a tough year for the marketing sector in general and Real Affinity
has not escaped the effects of a general reduction in corporate spend in the
sector. However, we are now starting to see an upturn in the levels of new
business opportunities and through the hard work of your Board we feel we have
positioned the business successfully to take advantage of this fledgling
recovery. Our recent success in securing the DaimlerChrysler Services contract,
which will contribute significantly to our future financial performance,
highlights this and solidifies our increased levels of confidence going forward.
In line with our expectations, turnover for the year was down by 29% at #5.96m
(2002: #8.4m) and gross profit fell by 25% to #2.42m (2002: #3.22m). This
reduction reflects last year's closure of our media division (2002: #1.7m) and
the absence of any travel client activity (2002: #1.1m). Operating profit from
trading activities recovered significantly in the second half to #0.01m. After
interest, tax, depreciation, amortisation charges at #0.35m, central overheads
of #0.39m plus exceptional items of #0.45m, the loss for the year pre tax was #
(1.3m).
However, I do not expect this performance to be repeated as the board has made
significant progress in reducing the operating expenses of the Group and we have
been successful in securing a release from our onerous London property lease
that will save the Group #0.8m.
There have been a number of external and internal issues, which have shaped our
business during the period. As previously mentioned, general market conditions
have remained difficult during 2002. The results of a report released as
recently as July 2003 by the Institute of Practitioners in Advertising confirmed
that 29% of advertisers had cut their budgets in the last year and 20% of
marketing directors admitted to a reduction in their direct marketing spend.
This continued lack of business confidence has made the planning and management
of our resources and overheads difficult.
Your board continues to believe that the Real Affinity proposition is still
appropriate and will, in the longer term, provide a good return for investors.
We want to build a group of highly motivated, entrepreneurial companies aiming
to advise clients on the most effective and measurable ways of building customer
relationships. Real Affinity now has an extensive blue chip client list, which
includes amongst others, Parcelforce Worldwide, Green Flag Motoring Assistance,
InterContinental Hotel Group, Rizla, Procter & Gamble Professional, Open
University Business School and the Civil Aviation Authority.
As we noted in our interim results, discussions working towards the acquisition
of Fox Kalomaski were terminated by mutual consent. As a result we have focused
much of our attention on consolidating our existing business by expanding the
levels of activity with our existing clients. This has proven successful, and is
reflected by a 35% increase in income from our top five clients compared to the
previous year.
Gaining new business is central to our plans and the previously mentioned
DaimlerChrysler win by our subsidiary The Ladders Agency as well as important
contract gains by Ecomextra in the education and local government sectors since
the year-end, provides evidence of an improvement in prospects that we expect to
continue. Organic growth will play a significant role alongside additional
acquisition activity as market conditions improve.
We will continue to monitor the market and such opportunities as they present
themselves but recent experience suggests a cautious approach is prudent until
wider confidence is evident. However, we are seeing a slight pickup in corporate
activity, which for the sector is a move in the right direction.
Our management team at Board level and within our subsidiaries has shown great
determination along with all employees in striving to return to past levels of
efficiency and profitability. Their durability has been severely tested both
professionally and personally, and I believe they have passed the test
admirably. I can also sense their growing confidence, and I would like to thank
them for their efforts on behalf of all shareholders.
The Chief Executive and Financial reviews detail the events of the year and the
proactive management decisions that were taken to improve the overall standing
and prospects for the business.
I look forward to delivering a more positive interim statement and results in
due course.
Tony Douglas
Chairman
CHIEF EXECUTIVE'S REVIEW
Introduction
This report covers our second year as a quoted business on the London Stock
Exchange's Alternative Investment Market. As predicted in my last report and in
line with expectation, a return to past levels of profitability has not been
possible. We do however believe that market conditions are improving and we are
working extremely hard to improve our financial performance going forward.
Following on from last year's dramatic challenges that dominated the second half
of the year, we laid down a revised business plan. This set out our objectives
to hopefully achieve a cash neutral position, secure our major clients, resolve
our London property issues and evaluate the opportunity for further
acquisitions.
The two key fundamentals to this plan and hitting our objectives were the
performance of our existing subsidiaries via an upturn in client confidence,
plus continuing the planned expansion of the Group, albeit in difficult
investment conditions.
Unfortunately trading conditions continued to be difficult and opportunities for
new business were met with intense competition. Client confidence was also
brittle during the first half, especially amongst our remaining financial and
travel clients. However the renewal of our Parcelforce contract and the recent
DaimlerChrysler Services win have increased our levels of confidence for the
future.
The combination of the continual fall in stock market values, plus vendor
indifference towards owning shares in public quoted companies and lack of
confidence within the investment community in media based companies, meant we
were unable to secure any acquisitions to fuel the expansion of the Group.
All of the above factors, required the board to continually review and manage
its cash resources, especially through the traditional summer downturn. The year
was a tough one with many exceptional challenges, but one where significant
progress was made in putting the business back in shape.
The trading year
Ladders (formerly known as Soup)
Our direct marketing subsidiary held the key to the Group's performance, as it
is our largest subsidiary. Its management team had a severe test in managing the
level of resource at a time when client uncertainty was at its highest. A loss
of over #1.0m in gross profit and a significant increase in its fixed cost via
the London office rent review compounded the challenge.
Overall turnover dropped by 11% to #5.76m from #6.45m and gross profit fell by
22% to #2.23m from #2.86m against the previous year. In real terms, like for
like sales amongst its top 5 clients grew by 35% and the drop in sales and gross
profit was directly attributable to the travel sector and the termination of the
AxaPPP contract. The loss of fees from these clients also affected the gross
margin of 39% against 44% achieved in 2003.
The first quarter of the year was always going to be the proving ground for the
period, which has historically been one of the strongest. However, the last
minute cancellation by a travel client of a large campaign and confirmation from
a leading financial institution that they were withdrawing their indicated
activity meant corrective action was required. Sales for the quarter were #1.37m
with gross profit of #0.59m. After operating expenses of #0.60m, the loss before
interest, tax, depreciation and amortisation was #(0.01m).
The reduction in the expected levels of profit and cash dictated that further
restructuring was necessary. A review by management led to the closure of our
small client unit leading to 11 staff being made redundant. At the same time, a
comprehensive review of all fixed costs was undertaken. Historically, sales in
the second quarter are weaker and this year proved no exception. Sales fell to
#1.14m with gross profit at #0.51m. Operating expenses had been reduced to
#0.53m, which provided EBITDA of #(0.02m). Fundamental restructuring costs of
#0.09m took the loss for the quarter to #(0.11m).
The first half loss was disappointing, however the fruits of those hard
decisions had a positive effect on the third quarter. Although sales dropped to
#0.98m, gross profit and the margin increased to #0.54m and 55% respectively.
The reduction in operating expenses over the previous quarter by #0.10m
increased EBITDA to #0.02m.
The final quarter of the year confirmed that significant progress was being
made. Sales increased to #2.27m and gross profit increased to #0.60m. Operating
expenses were continually reduced to #0.50m, therefore returning an EBITDA of
#0.10m before a series of one-off items and fundamental restructuring costs.
One-off costs of #0.09m were incurred including those related to termination of
the lease #0.03m and early termination of hire purchase contracts #0.01m. The
#0.05m balance of these charges was attributed to the settlement and associated
professional costs to a competitive marketing services group who held the
registration of the 'Soup' brand name. The addition of these costs meant a loss
of #(0.05m) was recorded.
In addition, we constantly sought advice from our property consultants, where we
attempted to rent some of the vacant space at our London office. This proved
unsuccessful due to the surplus of property in London and falling rental values.
However, we have been successful in negotiating a buy-out of our remaining term
of the lease. The direct cost for the buy-out amounts to #0.27m. This result
alone will save #0.4m per year in direct and associated costs. Full provision
for the London office termination amounted to #0.4m that included write off of
the remaining leasehold improvements.
Taking into account depreciation and interest charges of #0.2m and exceptional
items of #0.4m, the loss for the year amounted to #(0.6m).
On a more positive note, a number of significant achievements were made during
the year. A key objective for the period was the retention of key clients. I am
pleased to confirm that three major clients conducted competitive reviews and we
were successful in all three. Indeed, Parcelforce was retained for a further 3
years on increased fees.
Ecomextra
The plan for the new media subsidiary was to build on last year's success and
enhance both its resource and external reputation. Progress was steady
throughout the first and second quarters with sales of #0.07m and #0.09m
respectively. Gross profit and expenses of #0.12m meant breakeven at the half
year point was achieved as planned.
During the third quarter the expected level of new sales leads and conversions
did not materialise, which had a marked effect on the quarter. Sales and gross
profit both dropped to #0.03m and with expenses of #0.08m, a negative EBITDA of
#(0.05m) was recorded.
To try and improve the situation, the business development manager was changed,
which had a positive effect on both marketing and new business prospects. This
decision was directly responsible for securing larger projects. Sales in the
final quarter began to improve at #0.06m although expenses were reduced to
#0.07m; a further loss of EBITDA of #(0.01)m was added.
Sales for the year and gross profit for the year amounted to #0.25m and #0.2m
respectively against the previous 9-month period during 2002 of #0.29m and
#0.2m. Operating expenses of #0.3m resulted in an operating loss of #(0.10m) and
the addition of depreciation, interest and amortisation at #0.01m increased the
loss to #(0.11m).
While the financial result is a disappointment, our faith in the team remains as
strong as ever and the current performance has demonstrated that their
collective ability has great potential.
Group
At the start of the year budgets for the Group's expenses were reduced. In light
of the first quarter results from Ladders, the administration unit was reduced
further.
We continued to negotiate on acquisitions and although we raised funds in
September 2002, diminished confidence by potential vendors in the stock market,
led to the planned acquisition as disclosed at the time, being terminated by
mutual consent.
At this point, a decision was taken to reduce central operating expenses
further, with the full time executives turning their attention completely
towards the operating companies. Central overheads for the year amounted to
#0.39m against the previous year of #0.45m.
The combination of the losses in Ladders and Ecomextra plus the exceptional
items has produced a full year loss after tax of #(0.95m). While the board is
not happy with the trend this performance portrays, I am comfortable we have
acted responsibly in taking decisions at the appropriate time and the evidence
is now visible that the Group is now back in good working order.
Prospects for the group
The time invested by the board and its senior management has turned around the
fortunes of the Group. We now have a very lean and efficient vehicle where our
two existing subsidiaries are clearly demonstrating their talents in securing
additional revenue. The management team has been refreshed and they have a sharp
focus on their targets with the associated rewards.
In securing the release from our London lease, we have removed a significant
barrier for all stakeholders, which I believe will become even more evident as
time moves on.
We have seen an improvement in the confidence of our own client base, which has
lead to greater organic opportunities becoming apparent, alongside those from
new prospects.
The start to the year has been very encouraging!
Personally, I look forward with a greater level of certainty and confidence in
terms of our potential achievements for the year. We are extremely dedicated to
making Real Affinity a success and believe that all shareholders will reap the
benefits of our commitment to achieving our original goals both in the short and
longer term.
M S Richardson
Chief Executive
FINANCE REVIEW
As the effects of the 2001 downturn in the media sector continued to be felt,
the group saw a decline in sales to #5.9million. When measured against the
continuing operations from the previous year, this represents an 11% decline in
activity and reflects pressures on client budgets in most sectors.
With less reliance on media booking activity, the group has seen an increase in
its gross margins to 41% and there is no reason to indicate that this will not
continue.
Ladders has seen an increase in its first half loss of #(0.12m) to #(0.16m) at
the full year. The project based nature of Ecomextra's business has contributed
to a disappointing second half that resulted in a full year loss of #(0.11m).
When the group's central costs and goodwill amortisation are added, the
operating loss for the year increased to #(0.8m) (2002: #0.33m).
In addition full provision has been made for the successful surrender of the
London property lease, which combined with the termination costs of 11 staff
made redundant during the year, has added a further #0.45m in non-recurring
costs
Acquisitions
No acquisitions were completed during the year.
Cashflow and Funding
The Board's close management of the group's cashflow has been a key
responsibility during the year and has been eased by the provision of additional
funding from a subsidiary of the Royal Bank of Scotland Group, and since the
year-end, new working capital facilities from Barclays Bank.
Of the net current liabilities of #0.61m (2002: #0.003m), #0.31m (2002: 0.22m)
represents amounts payable by monthly instalments in respect of hire purchase
agreements and the costs of the lease surrender.
Accounting Policies
These financial statements have been prepared in accordance with all applicable
UK accounting standards.
Going Concern
On the basis of the issues disclosed in the Accounting Policies, and in
particular the successful negotiation of further funding since the year end, the
Directors consider it appropriate to continue to prepare the accounts on a going
concern basis.
M S Richardson
Chief Executive
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the year ended 31 March 2003 2003 2002
# #
TURNOVER
Continuing operations 5,962,053 6,699,193
Discontinued operations - 1,701,109
---------------- --------------
5,962,053 8,400,302
---------------- --------------
Cost of sales 3,536,131 5,173,417
---------------- --------------
GROSS PROFIT 2,425,922 3,226,885
Other operating expenses (net) 3,229,633 3,560,322
---------------- --------------
OPERATING LOSS ( 803,711) ( 333,437)
---------------- --------------
Continuing operations ( 803,711) ( 323,663)
Discontinued operations - ( 9,774)
---------------- --------------
( 803,711) ( 333,437)
Costs of fundamental reorganisation 450,781 310,525
---------------- --------------
LOSS ON ORDINARY ACTIVITIES BEFORE (1,254,492) ( 643,962)
INTEREST
Interest receivable 24 25,238
Interest payable 43,555 30,446
---------------- --------------
(1,298,023) ( 649,170)
Taxation ( 347,431) ( 162,333)
---------------- --------------
LOSS SUSTAINED FOR THE YEAR ( 950,592) ( 486,837)
================ ==============
(Loss) Earnings per Ordinary share: Pence Pence
Basic (1.80) (0.92)
Diluted (1.80) (0.92)
================ ==============
No separate Statement of Total Recognised Gains and Losses has been presented as
all such gains and losses have been dealt with in the profit and loss account.
CONSOLIDATED BALANCE SHEET
31 March 2003 2003 2002
# #
FIXED ASSETS
Intangible assets 796,950 897,916
Tangible assets 176,295 388,929
--------------- ---------------
973,245 1,286,845
--------------- ---------------
CURRENT ASSETS
Stocks 107,355 118,858
Debtors due within one year 963,416 1,124,145
Debtors due after more than one year
- deferred tax 605,370 257,939
Cash at bank and in hand 101,444 215,245
--------------- ---------------
1,777,585 1,716,187
CREDITORS: Amounts falling due within
one year
(including convertible debt) (2,390,146) (1,719,290)
--------------- ---------------
NET CURRENT LIABILITIES ( 612,561) ( 3,103)
--------------- ---------------
TOTAL ASSETS LESS CURRENT 360,684 1,283,742
LIABILITIES
CREDITORS: Amounts falling due after ( 130,442) ( 102,908)
more than one year
--------------- ---------------
230,242 1,180,834
=============== ===============
CAPITAL AND RESERVES
Called up share capital 52,946 52,946
Share premium account 1,370,690 1,370,690
Profit and loss account (1,193,394) ( 242,802)
--------------- ---------------
SHAREHOLDERS' FUNDS 230,242 1,180,834
=============== ===============
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 March 2003
2003 2002
# #
Cash flow from operating activities ( 147,352) ( 308,198)
Cash flow from exceptional item ( 96,052) ( 310,525)
Returns on investments and servicing ( 43,532) ( 5,208)
of finance
Taxation ( 78) 1,998
Capital expenditure and financial 13,009 ( 26,945)
investment
Acquisitions and disposals - ( 74,016)
--------------- ---------------
CASH FLOW BEFORE FINANCING ( 274,005) ( 722,894)
Financing ( 251,648) ( 363,557)
--------------- ---------------
DECREASE IN CASH IN THE PERIOD ( 525,653) (1,086,451)
=============== ===============
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN DEBT
2003 2002
# #
Decrease in cash in the year 525,653 1,086,451
Cash outflow from decrease in debt and ( 251,648) ( 378,057)
lease financing
--------------- --------------
Change in net debt resulting from cash 274,005 708,394
flows
New finance leases - 206,476
Cancellation of other debt - ( 500,000)
--------------- --------------
MOVEMENT IN NET DEBT IN PERIOD 274,005 414,870
NET DEBT/(FUNDS) AT 1 APRIL 2002 306,852 ( 108,018)
--------------- --------------
NET DEBT AT 31 MARCH 2003 580,857 306,852
=============== ==============
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 March 2003
1 EARNINGS PER ORDINARY SHARE
The calculation of basic loss per Ordinary share is based on a loss
of #950,592 (2002: #486,837) and is based on 52,945,850 (2002:
52,945,850) Ordinary shares, being the weighted average number of
ordinary shares in issue during the year.
The diluted loss per share is based on a loss for the year of
#950,592 (2002: #486,837) and is based on 52,945,850 (2002:
52,945,850) ordinary shares.
Share options and convertible loan notes have not been taken into
account in calculating the number of shares for diluted loss per
share as this would reduce the reported loss per share.
2. AVAILABILITY OF ANNUAL REPORT
Copies of the annual report and accounts of the Group for the year
ended 31 March 2003 are being sent to shareholders and are
available on the Company website, www.realaffinity.co.uk. Copies
are also available to the public, free of charge, from the offices
of Seymour Pierce, Bucklersbury House, 3 Queen Victoria Street,
London EC4N 8EL.
This information is provided by RNS
The company news service from the London Stock Exchange
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