(RLX.L) Relax Group PLC Buy/Sell

Operational Headlines

Outlook

Enquiries:

Ken Gaskell/Bernard Asher 020 7898 0512

Relax Group plc

Stephen Keys/Beth McKiernan 020 7397 8900

Cenkos Securities plc

INTERIM MANAGEMENT REPORT

for the SIX MONTHS ENDED 30 jUNE 2009

Results

In the six months to 30 June 2009, group turnover was £2.9m (6 months to 31 July 2008: £5.8m) and the operating loss before exceptional charges was £2.5m (6 months to 31 July 2008 loss £0.7m). The reduction in turnover was largely due to the impact of the credit crunch on the secured loans brokerage business where the lines of credit available to the providers of such loans reduced dramatically and a revision of accounting estimates used in evaluating work in progress. The increased operating loss is due to the reduced turnover coupled with increased operating costs due to including Relax Finance for a full six months.

Exceptional charges of £4.2m, largely non-cash adjustments due to revision of accounting estimates in the valuation of work in progress, result in an overall loss for the period of £6.8m (6 months to 31 July 2008 loss £1.7m).

The basic loss per share was 22.27p (6 months to 31 July 2008: 7.16p).

Net debt, consisting of bank loans and overdrafts less cash and cash equivalents, at 30 June 2009 was £4.1m (31 July 2008: £3.3m).

Senior Management Changes

Ken Gaskell was appointed as Chief Executive on 20 July 2009, taking over from Paul Carter who has stepped down to pursue other interests. On 11 August 2009 the group announced that Trevor Moore, the Finance Director had left the group and John Simms had been appointed as Acting Finance Director.

Strategic Review

Following his appointment, the new Chief Executive Officer, Ken Gaskell, initiated a detailed review of the group's operations in order to define a strategy to establish operational improvements, return the group to profitability and for future growth.

The Chief Executive Officer has now concluded this strategic review which has been adopted by the Board. The key conclusion was that the Group has suffered historically, principally from:

A detailed financial review has also been undertaken, including a review of accounting policies. This has led to a change in accounting policy for the treatment of Intangible Assets and a review of accounting estimates, in particular for the calculation of work in progress ('WIP'). Intangible assets have been reduced by £7.7m and WIP by £4.0m.

The strategic review has formed the basis of a detailed business turnaround plan, the first part of which has concentrated on further reducing the cost base of the group and has now largely been completed.

The Group's strategy is to focus on profitable growth opportunities in the rapidly growing debt management and remortgage markets.

However the issues noted above have left the Group in a heavily indebted position, and further funding is required to pay down a backlog of creditors, reduce debt and to provide the working capital investment required to grow revenues in order to return the Group to profitability.

Funding process

The Group is reliant on the existing and extended support of its bankers and creditors. As has been previously announced, banking facilities have been closely monitored. It is expected that the change in accounting policy will have an effect on the formal banking covenants going forward. The Group's bankers have provided financial support and continue to do so however, the Group requires a capital injection to reduce debt and provide working capital to grow the business.

The Group is at an advanced stage in negotiations to raise further funds and the future of the Group is dependent upon a successful conclusion to the discussions with its lenders and the capital injection. Until these matters are resolved there remains fundamental uncertainty over the Group's ability to continue as a going concern.

The interim financial information does not include any adjustments that might arise if the Group were not to be a going concern.

Operating Review

Outlook

The Group's cost base has been reduced significantly over the last nine months. Although headcount has halved since the final quarter of 2008, management are confident that improved efficiencies in operational processes give the Group more than adequate capacity to take full advantage of favourable trading conditions in the debt management sector.

The secured lending staff are now fully trained and experienced in the remortgage market which is showing very positive signs of recovery. We expect this will enable revenue growth in that segment.

The Group remains optimistic that the restructured business is capable of delivering well above market growth rates, although this is subject to a successful fund raising to stabilise the group's financial position.

Consolidated statement of comprehensive income for the six months ended 30 June 2009

Six months Six months Five months
ended ended ended
30 June 2009 31 July 2008 31 December 2008
(unaudited) (unaudited) (restated)
Note £'000 £'000 £'000
Revenue 2,888 5,790 4,011
Direct costs (1,003) (2,575) (3,708)
Gross profit 1,885 3,215 303
Operating costs (4,352) (3,890) (3,788)
Operating loss prior to (2,467) (675) (3,485)

exceptional costs
Exceptional costs 7 (4,216) (759) -
Finance income 8 5 20
Finance cost (116) (150) (148)
Loss before taxation (6,791) (1,579) (3,613)
Income tax expense - (136) -

Loss for the period
attributable to equity holders (6,791) (1,715) (3,613)

of the parent company

Earnings per share
Basic earnings per ordinary 8 (22.27)p (7.16)p (11.85)p

share
Diluted earnings per ordinary 8 (22.24)p (7.16)p (11.83)p

share

There were no other gains and losses other than those recognised in the statement of comprehensive income. All activities relate to continuing operations.

Consolidated statement of financial position as at 30 June 2009

As at As at As at
30 June 31 July 31 December

(unaudited) (restated) (restated)
£'000 £'000 £'000

Assets Non-current assets
Goodwill 5,068 5,505 5,193
Property, plant and equipment 586 620 644
5,654 6,125 5,837

Current assets
Trade and other receivables 4,081 12,851 9,511
Cash and short-term deposits 336 186 -
4,417 13,037 9,511
Total assets 10,071 19,162 15,348

Equity and liabilities Equity attributable to equity holders of the parent company
Share capital 3,049 3,049 3,049
Share premium 8,708 8,708 8,708
Merger reserve (1,513) (1,513) (1,513)
Retained earnings (10,782) (378) (3,991)
(538) 9,866 6,253

Current liabilities
Trade and other payables 10,346 8,112 8,979
Corporate income tax payable 72 895 80
10,418 9,007 9,059
Liabilities due after one year 191 289 36
Total liabilities 10,609 9,296 9,095
Total equity and liabilities 10,071 19,162 15,348

Statement of changes in equity for the six months ended 30 June 2009

Share Share Merger Retained
capital premium reserve earnings Total
£'000 £'000 £'000 £'000 £'000

Group Changes in equity for the PERIOD to 31 July 2008
Balance at 1 February 2008 2,109 5,527 (1,513) 1,337 7,460

(restated)
Total comprehensive expenditure - - - (1,715) (1,715)

for the period
Issue of share capital 940 3,290 - - 4,230
Issue costs - (109) - - (109)
Balance as at 31 July 2008 3,049 8,708 (1,513) (378) 9,866

(restated)

Group Changes in equity for the period to 31 December 2008
Total comprehensive expenditure - - - (3,613) (3,613)

for the period
Balance as at 31 December 2008 3,049 8,708 (1,513) (3,991) 6,253

(restated)

Group Changes in equity for the period to 30 JUNE 2009
Total comprehensive expenditure - - - (6,791) (6,791)

for the period
Balance as at 30 JUNE 2009 3,049 8,708 (1,513) (10,782) (538)

Consolidated statement of cash flows for the six months ended 30 June 2009

Six months Six months Five months
ended ended ended
30 June 2009 31 July 2008 31 December 2008
(unaudited) (unaudited) (restated)
£'000 £'000 £'000

Cash flows from operating activities
Operating loss (6,683) (1,434) (3,485)
Depreciation of property, 82 77 74

plant and equipment
Impairment of goodwill - - 312
Profit on disposal of - (8) -

property, plant and equipment
Other non-cash movement - 20 1
Decrease/(increase) in 5,430 511 3,340

receivables
Increase/(decrease) in 829 (527) 143

payables
Income taxes paid (8) (9) (815)
Net cash INFLOW/(OUTFLOW) FROM (350) (1,370) (430)

operating activities Cash flows from investing activities
Net interest paid (108) (145) (128)
Acquisition of Relax Finance - (1,099) -

Limited (including costs of £123,000)
Acquisition of PB Recovery - (1,314) -

Limited (including costs of £104,000)
Acquisition of property, plant (30) (18) (98)

and equipment
Disposal of property, plant 6 63 -

and equipment
Net cash used in investment (132) (2,513) (226)

activities Cash flows from financing activities
Net increase in borrowings - 1,387 250
Proceeds on issue of shares - 2,730 -
Cash outflow from decrease in (66) (127) (268)

debt and finance leasing
Cost of share issue - (109) -
Net cash from financing (66) 3,881 (18)

activities
Net INCREASE/(decrease) in (548) (2) (674)

cash and cash equivalents
Cash and cash equivalents at (875) (199) (201)

start of PERIOD
Cash and cash equivalents at (1,423) (201) (875)

end of PERIOD

Notes to the interim consolidated financial statements for the six months ended 30 June 2009

1. FUNDAMENTAL UNCERTAINTY

The Group is reliant on the existing and extended support of its bankers and creditors. The directors are currently in negotiations regarding proposals for re-financing the Group. These negotiations are progressing in a positive manner however there is no guarantee that they will lead to a successful re-financing and there is therefore fundamental uncertainty in respect of the Group's ability to continue as a going concern.

The interim financial information does not include any adjustments that might arise if the Group were not to be a going concern.

2. BASIS OF PREPARATION

The interim financial report for the six months ended 30 June 2009 has been prepared in accordance with IAS 34, 'Interim financial reporting', as adopted by the European Union. The interim financial report is unaudited and has not been reviewed by the auditors. The financial information does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.

The company's accounting reference date was changed to 31 December from 31 July during 2008 and the comparative figures in this report are shown for the six month period to 31 July 2008 and for the five month period to 31 December 2008.

The comparative figures for the period ended 31 December 2008 have been extracted from the Group's financial statements, on which the auditors gave an unqualified opinion, were approved by the Board on 4 June 2009 and delivered to the Registrar of Companies. The comparative figures have been restated to include the effects of the change in accounting policy and the correction of prior period errors described in notes 4 and 5 below. The restatements have not been audited.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies that have been applied in the preparation of the Interim Financial Statements are the same as will be applied in the preparation of the forthcoming annual financial statements and are the same as were applied in the preparation of the Group's consolidated financial statements for the period ended 31 December 2008 other than as set out in note 4 below.

4. ACCOUNTING POLICY CHANGE

The directors have reviewed the accounting policy applied by the Group in regard to Intangible Assets - Databases.

The Group acquires data on potential customers by purchase of data from specialist lead providers and by the capture of data using the various internet websites operated by the Group. This data is used by the selling and customer service teams to contact potential customers and market the Group's products. The data is retained but is not updated as a matter of course.

In previous accounting periods the lead data purchase costs and data capture costs have been capitalised as an intangible fixed asset. In carrying out their review the directors have taken into account that the Group has no exclusivity arrangements or any rights to protect access by others to the customers and therefore has little control over any future economic benefits from this data. The Group does not sell on any of the data. The directors have concluded that the previously applied accounting policy is not appropriate and that lead data purchase and data capture costs should be expensed as incurred. The effects of this change in accounting policy have been applied retrospectively and the effects on the comparative information are shown below:

Five months ended Six months ended
31 December 2008 31 July 2008
£'000 £'000
(Decrease) in revenue (1,888) (2,390)
(Increase) in direct costs (1,782) (330)
Decrease in income tax expense - 404
(Decrease) in profit (3,670) (2,316)

As at As at As at
31 December 2008 31 July 2008 31 January 2008
£'000 £'000 £'000
(Decrease) in intangible (7,696) (4,608) (900)

assets
Increase in goodwill 988 988 -
(Decrease) in trade and other (582) - -

receivables
Decrease in corporate income 404 404 -

tax payable
(Decrease) in equity (6,886) (3,216) (900)

5. CHANGE IN ACCOUNTING ESTIMATE AND PRIOR PERIOD ERRORS

Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction at the balance sheet date. The revenue work in progress ('WIP') is included under trade receivables. The basis of valuing the revenue WIP including the phasing of work carried out over the life cycle of each product has been reviewed, taking into account the recoverability of the WIP from future revenues, in particular with regard to Trust Deeds where actual time costs are booked to cases for recovery on client fund distributions, and for Debt Management Plans where there is no formal end date and the ongoing monthly fees are relatively low. The outcome of the review has resulted in a change in accounting estimates which has reduced the carrying value of revenue WIP by £4,046,000 which amount has been included as an exceptional charge in the income statement for the current period.

The valuation of the WIP included in the comparative periods has been reviewed and it has been found that the accounting policy had not been correctly applied in two respects. Firstly some elements of the WIP have been found to include amounts equivalent to output VAT and secondly some WIP had been included for transactions in the sales pipeline but not completed at 31 December 2008. Revenue in the income statement should not include VAT and revenue should only be recognised when the sale transaction has completed. These prior period errors have been corrected by retrospective restatement of the comparative amounts and the effects are shown below:

Five months ended Six months ended
31 December 2008 31 July 2008
£'000 £'000
(Decrease) in revenue (611) (319)
(Decrease) in profit (611) (319)

As at As at As at
31 December 2008 31 July 2008 31 January 2008
£'000 £'000 £'000
(Decrease) in trade (1,111) (500) (181)

receivables
(Decrease) in equity (1,111) (500) (181)

6. SEGMENTAL REPORTING

The Group has adopted IFRS 8 Operating Segments, which requires segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision makers in order to allocate resources to the segment and to assess its performance. Set out below are highlights of segmental performance based on IFRS 8 with full disclosure to be included at year end.

Revenue and profit before tax are attributable to the Group's provision of a range of financial solutions including Individual Voluntary Arrangements, Scottish Trust Deeds, Debt Management Plans and Secured Loans or Second Mortgages, to over-indebted individuals. All revenue originated in the UK.
IVAs and debt Secured lending
management and remortgages Consolidated
Six months ended 30 June 2009 £'000 £'000 £'000

(unaudited)
External revenue 2,548 340 2,888
Segment result (5,026) (1,765) (6,791)
Segment assets 4,578 5,493 10,071
Segment liabilities 5,950 4,659 10,609
IVAs and debt Secured lending
management and remortgages Consolidated
Period 1 August 2008 to 31 £'000 £'000 £'000

December 2008 (restated)
External revenue 1,943 2,068 4,011
Segment result (1,539) (2,074) (3,613)
Segment assets 9,790 5,558 15,348
Segment liabilities 3,218 5,877 9,095
IVAs and debt Secured lending
management and remortgages Consolidated
Six months ended 31 July 2008 £'000 £'000 £'000

(restated)
External revenue 3,653 2,137 5,790
Segment result (2,490) 775 (1,715)
Segment assets 13,009 6,153 19,162
Segment liabilities 5,864 3,836 9,700

7. EXCEPTIONAL COSTS
Six months Six months Five months
ended ended ended
30 June 2009 31 July 2008 31 December 2008
(unaudited) (unaudited) (restated)
£'000 £'000 £'000
Restructuring costs 170 404 -
Compensation for loss of - 355 -

office
Adjustment to work in progress 4,046 - -

( see note 4)
4,216 759 -

8. EARNINGS PER SHARE
Six month Six month Five month
period ended period ended period ended
30 June 31 July 31 December

Earnings (unaudited) (unaudited) (restated)

Basic EPS
Reported earnings (£'000) (6,791) (1,715) (3,613)
Reported EPS (p) (22.27)p (7.16)p (11.85)p

Diluted EPS
Diluted reported earnings (6,791) (1,715) (3,613)

(£'000)
Reported diluted EPS (p) (22.24)p (7.16)p (11.83)p
Six month Six month Five month
period ended period ended period ended
30 June 31 July 31 December

No. of shares Number Number Number

Weighted average number of ordinary shares:
Issued ordinary shares at 1 30,493,255 21,093,254 30,493,255

January 2009
Effect of 18 March 2008 share - 2,243,836 -

issue
Effect of 23 May 2008 share - 630,137 -

issue
Weighted average number of 30,493,255 23,967,227 30,493,255

ordinary shares
Average shares used in 30,493,255 23,967,227 30,493,255

calculating the Basic EPS calculation
Dilutive share options 36,309 - 36,309

outstanding
Weighted average number of 30,529,564 23,967,227 30,529,564

ordinary shares

9. RELATED PARTY TRANSACTIONS

All inter group transactions between Group enterprises have been eliminated on consolidation.

During the period, the Group engaged Olivine Partners LLP and Olivine Capital Partners Limited of which Stuart Cumberland is a Member and Director respectively to undertake corporate finance and tax advisory services. Fees payable totalled £110,729 in the six month period to 30 June 2009, for professional services provided as a Director and for strategic tax advice. A total of £52,478 was outstanding as at 30 June 2009.

The Company continues to honour a lease agreement with Paul Carter, the former Chief Executive Officer, for the provision of four separate office buildings at Gisborne Close, Ireland Business Park, Staveley, Chesterfield S43 3JT of which Paul Carter is the landlord. During the period the Company incurred rent and service charges in respect of the premises totalling £200,000. As at 30 June 2009 a total of £114,185 was due to Paul Carter.

As part of the acquisition of Relax Finance Limited, the Company issued £300,000 in the form of unsecured loan notes which bear interest on the amount outstanding at the Barclays Bank base rate, redeemable in 20 equal monthly instalments of £15,000 each, beginning in January 2009. Ian Guy and Carl Kroger received £153,000 and £57,000 loan notes respectively. During the period no interest was paid to Ian and Carl respectively and at the period end £145,350 and £45,259 was outstanding on the loan notes.

Included within creditors due within one year at 30 June 2009, is an amount of £130,000 due to Ian Guy, in respect of a loan made to Relax Group PLC on 30 April 2009.

As at 30 June 2009 the Company's subsidiary undertaking, Relax Finance Limited, owed Ian Guy £24,244 in respect of loans made to the Company.

10. SUBSEQUENT EVENTS

Since 30 June 2009 and as part of the ongoing strategic realignment, the Group has vacated one of the buildings at Gisborne Close, Staveley, and will shortly vacate another. The buildings are subject to lease agreements which expire in 2018 and 2016 respectively.

This information is provided by RNS The company news service from the London Stock Exchange

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