(DAV.L) Davenham Group PLC Buy/Sell

RNS Number : 4583B Davenham Group PLC 27 October 2009

Davenham Group plc

Annual Report and Accounts

27 October 2009

DAVENHAM GROUP PLC

ANNUAL REPORT AND ACCOUNTS

Davenham Group plc confirms that its audited report and accounts for the year ended 30 June 2009 has been sent to shareholders on 26 October 2009 together with the Notice of AGM and Proxy Form. A copy of the audited report and accounts is available on the company's website at www.davenham.co.uk

For further information, please contact:

Davenham Group plc

Paul Burke 0161 832 8484

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

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LONDON, Sept 29 (Reuters) - British small business lender Davenham Group Plc:

RNS Number : 8104Z
  Davenham Group PLC
  29 September 2009
   

29 September 2009

Davenham Group plc

Results for the year ended 30 June 2009

Davenham Group ("Davenham", "the Group" or "the Company"), a leading independent asset based lender to the UK SME sector, today announces its results for the year ended 30 June 2009.

Financial Performance Summary

*       Loan portfolio reduced to £193m (2008: £284m)+
*       Revenue of £49.1m (2008: £53.1 m)
*       Operating loss (before exceptional items) of £48.9m (2008:profit of £13.1m)
*       Pre-tax loss of £55.4m (2008: profit of £12.7m)++
*       Impairment charge of £49.2m (£66.7m inclusive of gross up+++) (2008: £3.8m (£7.4m inclusive of gross up)) of which c. 84% is in relation to the impairment of the property portfolio;
-         c. £31 million (c. £38 million inclusive of gross up) of this was reported at the interim results
*       Net asset value of £10.9m (2008: £58.2m)
 
+ including letters of credit of £2.1m (2008: £7.2m).
++Pre-tax loss is stated after charging costs of £3.2m in relation to the restructuring of the business, the movement in the value of derivatives not qualifying for hedge accounting of £3.0m and transformation costs associated with restructure and resizing of £0.3m.
+++ Gross up is defined as interest income which continues to be recognised on impaired loans, and is included within the Group*s revenues, for which a corresponding loan loss charge is made.
           

Strategic and restructuring update:

*       £215m refinancing of the Group*s banking facilities to support new strategy
*       Extensive strategic review carried out, resulting in:
-         Focus on our trade and asset portfolios within appropriate parameters; and
-         Ceasing writing new facilities whilst optimising recoveries from our property portfolio
*       Good progress with de-leveraging the business to a smaller operating cost base
*       Loan portfolio reduced further to £173m as at close of business on 28 September 2009
*       Sales offices in Scotland, Liverpool, Newcastle and Bristol closed
*       Headcount reduced by 29%
*       Annualised cost savings of £3.6m achieved
*       £6.5m of exceptional restructuring costs incurred
*       David Bowles has resigned from the Board to pursue new business interests
    

    

Commenting, David Coates, Chief Executive, said: 

"Over the past nine months we have taken decisive action to change Davenham's strategy to meet a very challenging economic environment.

Significant progress has been made in

-Reducing credit risk

-Reducing operating costs

-De leveraging

-Optimising recoveries

-Downsizing the property book.

"We do not see a significant uplift in the economic environment currently and we will continue to focus on collecting-out our property book. Our banks continue to show support for the Group and we are working closely with them. Now that the rate of provisioning across our property book has slowed, the Board has appointed Hawkpoint to evaluate the options available to maximise stakeholder value."
      For further information please contact:

 Davenham Group plc                                    0161 832 8484
 David Coates, Chief Executive                    www.davenham.co.uk
 Paul Burke, Finance Director

 Hawkpoint Partners Limited (Nominated Adviser)        020 7665 4500
 Lawrence Guthrie / Joseph Ayala 

 Smithfield                                            020 7360 4900
 Reg Hoare / Katie Hunt / Rebecca Whitehead 

      Chairman's Statement

The 2009 financial year was the most challenging in recent memory. The credit crunch continuing throughout the year and the recession starting last Autumn had a severe impact on the economy in general, and on the property market in particular. Despite having tightened property lending criteria in the Spring of 2008, the Group has experienced an unprecedented rise in the number of non performing assets in the property loan book.

A full strategic review of the business was undertaken in the year. This review received the full support of our banking syndicate and underpinned the new two year banking agreement in March 2009. 

Performance Summary

Against this background, and given that property loans comprise over 63% of our loan book, our results for the year ended 30 June 2009 have been severely affected by a high level of provisions. Impairment charges of £66.7m (2008: £7.4m) were taken against loans believed to be at risk, of which approximately 82% relates to the property portfolio. This was the major factor in producing an operating loss before taxation and exceptional items of £48.9m (2008: profit of £13.1m) and fully diluted losses per share of 163.99p (2008: earnings per share of 35.17p). The net assets of the Group fell to £10.9m (2008: £58.2m).

Dividend Policy

The Group has agreed with its banking group not to make dividend distributions in the short term. The suspension of dividend payments has the benefit of preserving cash for the Group.

Our people

A number of our staff left the Group during the year as a result of phased restructuring. I would like to thank them for their contribution to the Group and to wish them well in their future careers. 

We remain confident that the professionalism and commitment of our remaining staff will serve us well as the challenging times continue. On behalf of the Board, I would like to thank all of our employees for the tremendous efforts they have made in a time of unprecedented change.

Given the downsizing of the Group and the contraction of its asset base, the risk management function is now being embraced within the operating divisions. In line with this structural change, David Bowles has resigned from the Davenham Board with immediate effect. We would like to thank him for his contribution to the development of the Group and wish him success in his future career.

Summary

The economy is expected to remain difficult in the year ahead. The March 2009 refinancing and restructuring was designed to allow the Group to meet the continuing challenges of working out the non performing elements of its book in order to position it to benefit from an eventual economic recovery. Nevertheless, a renegotiation of the banking agreement is likely to be required during the current financial year.

James Kerr-Muir

Chairman 

29 September 2009
      Chief Executive's Report

Introduction 

The past twelve months have seen the problems in the world's capital markets which were first identified in mid 2007 impact deeply on the world economy, putting the UK firmly into recession. This has had a particularly brutal effect upon the Group's core SME market, and in particular its property finance clients, many of whom are struggling for survival.

Reflecting these global events and a downturn in our results, we completed a thorough review of the business in Autumn 2008, leading to our decision to focus on operating our trade and asset portfolios within appropriate parameters, whilst optimising recoveries from our property portfolio. 

In March 2009, we reported that we had successfully refinanced the Group's banking facilities and restructured our operating divisions. Nevertheless, the quantum of the downturn, specifically in the property market, has been greater than many commentators anticipated.

Trading Overview

The deteriorating economy has affected Davenham in three principal ways:

*     In our property book, clients found it increasingly difficult to repay our loans, either through the successful sale of their property or through refinancing. The impact became more severe as property prices began to fall sharply;

*     In the SME marketplace, the Group's heartland, across a wide variety of sectors, many businesses became increasingly vulnerable to insolvency; and

*     In the small ticket asset and professional loans market, the Group's loan books experienced a higher rate of default, whilst recovery against asset values started to fall as the assets themselves fell in value.

The result of the above principally caused a significant rise in the level of loan impairment most notably within the Group's property loan portfolio, as initially reported upon in March 2009 and confirmed in these results.  

Strategic review 

During the Autumn of 2008 we carried out a thorough review of the business, leading to the decision to focus on operating our trade and asset portfolios within appropriate parameters, whilst optimising recoveries from our property portfolio. 

Overall, these changes are resulting in a significant de-leveraging of the business to a smaller operating and cost base, a lower loan portfolio and smaller balance sheet. 

As part of the strategic review the Group has taken the following specific actions:

*     Ceased new business in the property division

*     Ceased new business in small ticket leasing and professional loans

*     Closed offices in Liverpool, Glasgow and Bristol

*     Reduced its staffing levels from 193 in mid 2008 to 129 currently

*     Reduced its banking facilities from £300m to £180m

*     Reduced its indebtedness to its banking group from £235m to approximately £168m as at 29 September 2009

*     Traded cautiously and at a reduced level in its trade and asset divisions

*     Further resourced its property management group with specialist property asset professionals

The net result of these actions is that operating costs have been reduced by 25% and the risks within the loan portfolios have reduced. Additionally all the portfolios have been provisioned at sensible levels.

The objective has therefore been to ensure the Group weathers the recessionary forces in the economy emerging into what will be a significantly changed operating environment for financing SMEs.

Operating review

Property

As the Group results indicate our specific provisions have increased to £37.8m largely as a result of our clients being unable to refinance or sell their properties to effect repayment of the associated loans. This has been complicated by the serious falls in property values across the UK, of up to 25% in most regions. This has led to arrears, default and in some cases very serious solvency issues for our clients.

In many cases where properties have been repossessed from clients, the Group has often been required to complete and get properties ready for sale to optimise exit values. We have met this challenge by taking on property professionals to support our loan officers and develop full asset management skills within the team. The Group's stance is to work closely with all its clients to protect mutual value which has seen our clients successfully redeem £57m of property based loans in the last twelve months. This has been an outstanding achievement by our clients and staff.

However, in some cases where relationships have broken down or our clients have tried to abrogate their obligations, we have had no option but to take legal action.

The division is currently managing gross assets of £151m with specific provisions of £29m. Our intention is to redeem these loans over the next 18-24 months. The Group continues to take a conservative stance in respect of the property market outlook, notwithstanding that market commentators are referring to a potential recovery being underway.

Asset

The asset division has three main elements:

Large ticket assets including Manor Credit

Whilst asset values have generally fallen and SMEs are naturally cautious about taking on further commitments, demand for this type of finance remains steady. This is the core of the Group's asset offering both through hire purchase and leasing. Arrears and bad debts have inevitably increased as the economy has slowed, but these are not out of line with management expectations. 

Small ticket leasing

This book is in 'run down' and is liquidating at the expected rate. Individual leases remain problematic with very little underlying asset security. Legal action to recover smaller sums is ongoing.

Professional loans

This book is also in run down with workout strategies being employed by the Group across sole traders and partnerships.

Trade

The trade division embraces a series of working capital products secured against debtors, stock and underlying transactions. The division continues to trade cautiously and is well positioned to address the tough current trading environment.

      Central

The central area of the Group provides services to the rest of the Group including HR, Training, Finance, Company Secretarial, Treasury and Marketing. Many of these areas have been scaled back as part of the downsizing process.

Banking

As stated elsewhere in this report the Group refinanced in March 2009. This new two year facility was tailored to support the asset and trade divisions' working capital requirements whilst reflecting the recovery of cash from the downsizing of the property loan book.  

Outlook

Over the past nine months we have taken decisive action to change the Group's strategy to meet a very challenging economic environment.

Significant progress has been made in:

-Reducing credit risk

-Reducing operating costs

-De-leveraging

-Optimising recoveries

-Downsizing the property book

We do not see a significant uplift in the economic environment currently and we will continue to focus on collecting-out our property book. Our banks continue to show support for the Group and we are working closely with them. Now that the rate of provisioning across our property book has slowed, the Board has appointed Hawkpoint to evaluate the options available to maximise stakeholder value.

David Coates

Chief Executive

29 September 2009
      Business Review 

These are the second set of consolidated Financial Statements reported by the Group in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU.  

This has been a very challenging year for the Group as the impact of interest rate cuts and the liquidity squeeze led to a more difficult market place. It was during the latter part of 2008 that the Group implemented the revised strategy, highlighted in the Chief Executive's Report.

The property division operated in a market experiencing rapid decline. This was reflected in the paucity of transactions, the period of time taken to sell a property and the prices being achieved. The Group was unable to charge interest on a large proportion of its property exposures due to the overall value of the property collateral being less than the level of the original loan advanced. 

In addition, both the asset and trade portfolios began to see the impact of recessionary pressures as customer's access to liquidity was squeezed and overall levels of trading activity were reduced. 

The cash discounting treatment of non-performing loans within the property portfolio (together with the fair value adjustment of the swap portfolio) has had a material impact on the Group's results under IFRS (and a significantly greater impact than would have been the case under UK GAAP).

Financial Highlights

In this intensely difficult market, Group revenues decreased by 8% to £49.1m (2008: £53.1m). The loan portfolio, including letters of credit, reduced by 32% to £193m (2008 : £284m). 

Loss before tax and exceptional items was £48.9m (2008: profit of £13.1m) after charging £66.7 million (2008: £7.4 million) for impairment, the vast majority relating to the performance of the property portfolio. The impairment charge is inclusive of gross up which amounted to £17.5m (2008: £3.7m) for the year reflecting the opportunity loss on many of the Group's property loans.

Exceptional costs of £6.5m increased the loss before tax to £55.4m (2008 profit of £12.7m). 

The Group's effective tax rate during the year was 26.7% (2008: 30.6%). A full analysis of the tax charge for the year is set out in note 7 to the financial statements.

Exceptional costs

During the year, the Group recognised a number of items, within administrative expenses, which due to their size and unusual nature are disclosed as exceptional costs.

In view of the significant shift in market conditions, the Group initiated a new strategy which has resulted in the implementation of a number of restructuring initiatives, leading in turn to costs being incurred in respect of the new banking facilities, office closures and redundancies. These costs have been disclosed as exceptional. 

The Group's debt levels fell below the overall size of the swap portfolio, as a result of the Group's revised strategy. As a consequence, the Group incurred a charge of £3.0m (2008: £nil) in relation to fair value movements on its interest rate swaps which were no longer designated as hedging drawn down debt.

Borrowing facilities

In late 2006, the Group had negotiated a revolving total facility agreement of £300m which was due to expire in December 2009. As part of the Group's revised strategy, concerns over the levels of liquidity within the wholesale banking market, and potential for covenant pressure, the Group refinanced its banking lines early. It agreed a new two year facility with its existing syndicate of banks on 23 March 2009. The interest rate increased from 125bps over LIBOR to 300bps over LIBOR under the new agreement.

The new facility was tailored to ensure the working capital requirements of the asset and trade divisions were met whilst reflecting the recovery of cash from the reduction of the property loan book. 

The facility commenced at £215m and contains covenants and other undertakings (including the need to obtain banking group consent to the payment of any dividends) that the Board considered acceptable in the prevailing financial environment and appropriate when adopting the new strategy.

The facility levels as determined by the new banking agreement are required to reduce in line with predetermined step downs to £90m by September 2010.

Cash flow

Management focussed on the trade and asset portfolios, whilst at the same time investing considerable efforts towards cash generation resulting in a net reduction of its indebtedness by £38m in the year to £179m, as at 30 June 2009. The cessation of lending within the areas of property, small ticket asset and professional loans, together with a strong focus on recoveries, particularly in property, were the prime drivers in the Group's overall reduction in its debt levels.

Administrative expenses

During this prolonged period of severe economic turmoil, the Group continues to carefully manage its business, taking hard decisions to remove costs where practicable. 

Shareholders' Return

Fully diluted losses per share were 163.99p (2008: earnings per share of 35.17p) with basic losses per share being calculated at 163.99p (2008: 35.75p).

In light of the current economic conditions, the Group has agreed with the banking group not to make dividend distributions currently.  

Key Performance Indicators  

A number of KPIs are used by the Group in managing the business. The following provides an explanation of the purpose and basis of the calculation for these KPIs:

Revenue

Measurement of income generated from the deployment of the Group's product portfolio. Income is calculated based upon the various product margins charged and fees applied and recognised in accordance with the Group's income recognition policies, excluding the impact of gross-up adjustments (the nature of this adjustment is explained in note 2 of the annual report and accounts).

 2005  UK GAAP  £28.5m
 2006  UK GAAP  £32.7m
 2007  IFRS     £38.6m
 2008  IFRS     £49.5m
 2009  IFRS     £31.6m

The reduction in revenue is primarily reflective of a high number of non-performing accounts being suspended, resulting in income being frozen, due to the quality of the underlying Loan to Value. Declining portfolio levels in Asset and Trade have also contributed to lower income streams. 

Profit/(Loss) before tax and exceptional items

Measurement of the Group's return on employed business resources. The measurement is based upon income less interest payable, impairment and administrative expenses.
      
 2005  UK GAAP  £8.1m
 2006  UK GAAP  £10.4m
 2007  IFRS     £11.6m
 2008  IFRS     £13.1m
 2009  IFRS     (£48.9m)

The reduction in revenue combined with the requirement for unprecedented levels of impairment charges has led to the Group recording a loss for the first time in its history.

Loan Portfolio**

Total amount of the lending portfolio outstanding at the end of the financial year. 

The measure assesses the size of the portfolio and associated dynamics.

** including letters of credit and after loan loss provisions

 2005  UK GAAP  £154.7m
 2006  IFRS     £187.3m
 2007  IFRS     £248.0m
 2008  IFRS     £284.4m
 2009  IFRS     £193.0m

The net loan portfolio has decreased in 2009 as a result of ceasing to write new facilities in property, small ticket leasing and professional loans and a cautious lending approach in the asset and trade divisions. In addition, the requirement for substantial loan loss provisioning has further impacted on net portfolio levels.

Portfolio Mix

The portfolios for the three divisions within the Group have differing risk and margin characteristics. 

       Property    Trade       Asset
 2005  £68.7m      £46.2m      £39.8m
 2006  £91.1m      £56.0m      £40.2m
 2007  £150.4m     £56.0m      £65.2m
 2008  £154.6m     £58.4m      £71.4m
 2009  £110.1m     £27.7m      £53.2m

The net loan portfolios have decreased across all three divisions in line with the Group's revised strategy of operating its trade and asset portfolios within appropriate parameters, whilst optimising recoveries from its property portfolio.

Basic Earnings/(Loss) per share

Assessment of the creation of shareholder value, measured as the profit/(loss) on ordinary activities after taxation divided by the weighted average number of ordinary shares in issue during the year.

 2005  21.6p
 2006  27.4p
 2007  33.44p
 2008  35.75p
 2009  (163.99p)

There have been minimal movements in the weighted average number of ordinary shares in issue. The reduction in the earnings per share has been a result of the Group's trading losses.

Following the adoption of the Group's new strategy and the signing of the £215m facility in March 2009, the Group has in addition to the traditional KPIs detailed above focussed on its banking covenants, the key indicators being the step down of the facility from £215m to £90m and the underlying value of the Group's net tangible worth as defined under UK GAAP. These covenants are explained in more detail in the liquidity risk section on page 15.

Arrears and Impairment

In addition to the KPIs noted above the Group closely manages the following credit performance indicators:

*     Arrears

*     Non-performing debt

*     Bad debt charge

As an asset based lender, the Group assesses the underlying value of the asset against which it advances funds using the asset held as collateral security. Historically, it has been the detailed initial assessment of the underlying collateral that has been important in ensuring the levels of actual capital losses in a "normal economic environment" reflected as a bad debt charge, are kept to a minimum. However, the unprecedented turmoil in the financial markets has been reflected in the property market with a sharp reduction in the availability of mortgage finance both for the end user and the buy to let investor resulting in a substantial reduction in the value of collateral security held. Similar issues are being seen in the asset and trade divisions, as asset values decline as demand diminishes whilst the UK economy is in recession.

The deterioration of credit quality will typically manifest itself through three main stages which are reflected by the three indicators. 

Arrears on an account reflect the full balance regardless of the underlying security, which should be equivalent to the capital outstanding. This occurs where a customer is unable to service contractual repayments. Remedial action is taken to address the interest arrears and ensure that the funds advanced remain asset secured. Should the customer not be able to remedy the arrears an account becomes defined as non-performing. At this point further interest accrued to the account is suspended. 

While non-performing accounts can result in a loss of income, this historically has not necessarily resulted in a capital loss as the Group looks to realise the maximum value of underlying collateral. In the current environment, the Group has seen the value of this underlying collateral eroded substantially below values originally expected.

A bad debt charge is incurred where there is objective evidence to show that the carrying value is more than the future expected cashflows discounted at the original effective interest rate. In practical terms the value of the underlying collateral would be less than the outstanding loan. 

The speed at which credit quality has deteriorated, due to the current economic environment, has seen accounts pass directly to the bad debt stage.

The definitions of the metrics used and recent performance of each of these indicators are as follows:

Arrears, measured as the value of the Group's customers' accounts contractually in arrears shown as a percentage of the gross portfolio balance, are 66.7% (2008: 12.4%).

Non-performing debt, measured as the value of the Group's customers' accounts where the recognition of interest has been suspended shown as a percentage of the gross portfolio balance, is 64.5% (2008: 13.6%).
      
                 Property  Trade  Asset    Total
                    £'000  £'000  £'000    £'000
 Arrears
      2009          1,852      9  3,870    5,731
      2008         28,667    875  5,456   34,998
 Non-performing
      2009        132,332  4,941  8,745  146,018
      2008         29,597  3,810  4,879   38,286

Bad debt charge, defined as the specific provisioning charge (net of recoveries and before the effects of discounting) is £37.8m (2008: £3.1m).

In addition to the specific bad debt charge, the Group makes charges under IAS 39 'Financial Instruments: Recognition and Measurement'under the headings of gross up, cash discounting and collective impairment. These are defined below:

Gross up

IAS39 requires that income continues to be recognised on the outstanding balance of a loan at the original effective interest rate, irrespective of the contractual term and whether interest has been suspended or frozen. Currently interest is suspended or frozen if the Group believes the serviceability of the debt is significantly at risk. IAS 39 requires more interest to be recognised than actually deemed recoverable from the customer. As this interest is not deemed recoverable a corresponding loan loss charge is made.

Cash Discounting

The cash discounting charge is the amount of the loss measured as the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial assets original effective interest rate. The cash discounting charge unwinds as the related cashflows are received. 

Collective Impairment

Future cash flows for a group of loan assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the historical loss experience.

The total impairment charge for the year is analysed as follows into its constituent parts as defined by the Group's accounting policies: 

                           Property  Trade  Asset   Total
                              £'000  £'000  £'000   £'000
 Specific bad debt charge    31,259  1,873  4,652  37,784
 Cash discounting             8,508     88    233   8,829
 Collective impairment         (80)    789  1,922   2,631
 Sub-total                   39,687  2,750  6,807  49,244
 Gross up                    14,711  1,332  1,426  17,469
 Total                       54,398  4,082  8,233  66,713

This analysis highlights that the Group has incurred impairment charges of approximately £11.5m in relation to cash discounting and collective impairment. A material element of this relates to the property portfolio.  

As at 30 June 2009 the property portfolio has suffered an impairment charge in relation to cash discounting and collective impairment of approximately £8.4m in addition to specific provisions. As highlighted in the definitions above, as the property portfolio is disposed of the cash discounting provision will be released, provided the actual cashflows are the same as forecast, back into the income statement reflecting a positive impact on the Group's financial performance over the coming year(s).

The impairment charge is also increased by the level of gross up (see note 10). This charge is offset by a corresponding increase in the Group's revenues of £17.5m for the year. The charge is reflective of that element of the Group's portfolio where it is unable to recognise income. This is primarily in relation to the property portfolio as analysed in note 10. 

The level of capital loss the Group has or is expecting to incur (i.e. the shortfall between capital balances outstanding and the underlying collateral security) for the year ended 30 June 2009 amounted to £37.8m of the headline impairment level charged under IFRS of £66.7m.

The total balance sheet provisions as at 30 June 2009 under IFRS are as follows:

                        Property  Trade  Asset   Total
                           £'000  £'000  £'000   £'000
 Specific provision       29,076  1,681  2,930  33,687
 Cash discounting         10,416    305    385  11,106
 Collective impairment       306    931  2,093   3,330
 Total                    39,798  2,917  5,408  48,123

Risk Environment 

The Group is exposed to a number of risks arising from the nature of its business and the environment in which it operates. The Group historically operated in an environment that exposes it to higher risks than those faced by other more traditional mainstream business to business asset secured finance providers.

The business risks facing the Group have significantly increased and changed since late 2008, reflecting the worsening economic climate and the implications this carries for both short and long term performance. The impact of these increased and changing risks, especially in the property portfolio, have given rise to numerous changes in the risk management framework.

The primary areas of change have centred around liquidity risk and the property portfolio. The property portfolio has seen the Group having to consider differing types of risk and their management which are more aligned to a property investment / fund manager business as opposed to a provider of finance as highlighted in the Chief Executive's Report.

The Risk Management Framework has therefore been strengthened in response to these changes. 

Risk Management Framework

The risk framework is adopted and implemented through various risk management groups and committees who have been expanded during the year. The two notable additions have been in relation to the property portfolio and cash management. 

The principal risk management groups and their responsibilities are:

The Board of Davenham Group plc  

Responsibility for the overall risk framework and governance lies with the Board of Directors. 

The Audit Committee

The Audit Committee is a non-executive committee that works on behalf of the Board. Its key responsibilities include monitoring external auditor performance and ensuring the financial reporting, accounting policies and internal controls are monitored and assessed and correctly applied to the Group's reporting statements. 

Internal Audit

The development of a formal internal audit review has been delayed whilst the Group's financial resources are focused on the current financial challenges. The Board intends to commence the reviews once the current challenges have been addressed and believes it would not be appropriate to engage further resource at the current time.

Asset & Liability Management Committee (ALCO)

The committee was responsible for advising the Board on all matters relating to the balance sheet of the Group, specifically in relation to the following matters:

*     Capital structure and related matters;

*     Funding; and

*     Liquidity

The committee historically advised the Board and recommended actions it considered necessary or desirable to establish that the Group's balance sheet matters are suitably understood and managed. Due to the seriousness of the current financial challenges facing the Group the Committee no-longer advises the Board. The Board has now taken direct responsibility.

Group Risk

The function of Group Risk management is to provide the Board with independent oversight that risks are being adequately managed and providing the divisional risk functions with support and guidance as necessary. 

Risk Categorisation

The Group has identified the following key risks which could impact on the Group's ability to deliver its stated strategy: 

*     Credit Risk;

*     Property Risk

*     Treasury Risk;

*     Capital Risk;

*     Operational Risk; and

*     Strategic Risk

The following definitions of the Group's key risks also reflect how they are managed and mitigated.

Credit Risk

The Group acknowledges that the taking of credit risk in order to earn a return is a central facet of the Group's business model. This is the risk that a financial loss both in terms of earnings or capital will arise through a customer failing to meet the terms and obligations of their contract as they become due. This risk relates to the Group's exposure to its portfolio of loans and receivables.

Adverse changes in the credit quality of the Group's portfolio through a general deterioration in economic conditions has affected the recoverability and value of the Group's assets, including its loans and receivables and therefore its financial performance.

Concentration Risk

The loan portfolio within each product segment is broadly spread by both sector and geography.

Risk Management

The Group maintains a focussed risk management ethic and framework, core to the strategy and culture of the business. 

Portfolio Meetings

A key risk management control is the monthly portfolio meeting, used to discuss actions required on delinquent accounts, trends, recommendations for policy changes and provisions. 

The monthly portfolio reviews are managed by Divisional Risk Management on behalf of each product and division, with independent oversight provided by Group. They are held in conjunction with the divisional senior management, underwriters, customer facing teams and divisional risk managers.

In addition to the monthly portfolio management meeting as noted earlier, the Property Committee meets every week to discuss the performance of the property portfolio - both performing and non-performing accounts.

Risk Control

Risk is managed through the deployment of specialist and dedicated risk professionals within each division, with oversight provided by the Group Risk function. 

Specialist underwriters work in the divisions where they are closest to their markets. The underwriters have complete independence from the sales process. External professionals are used in combination with this internal expertise to conduct due diligence on the equity value of the assets being considered for finance, the customer's financial position and the ability of the commercial entity to repay any facility provided. 

On approval, credit risk is closely monitored by account managers. A rigorous control framework exists to escalate account level risk from an individual to the divisional management team and then to Group Risk. All accounts are reviewed for emerging risks on at least a monthly basis. 

Risk Classification and Monitoring

Each part of the Group's lending activities has defined risk classifications, consistently used across product ranges to ensure complete transparency. The main categories of debt are:

*     Performing

*     Arrears

*     Impaired

Sub-categories of the primary groups are adopted to give the Board greater depth to the performance of individual products. The assignment of loans to different risk categories is based upon the monthly portfolio review which reflects an assessment of the relative risk of default and the strength of the underlying security. The presentation of agreements to each monthly portfolio review is conducted on all debts that have or may breach the terms of their facilities. Each loan is subject to an independent assessment which determines the allocation of a risk category. 

Detailed account level exception reports are produced monthly to clarify the status of known risks to the Group and highlight potential emerging and new risks. The detailed account level information is collated in order for the Group to clarify its position on account level risk but also to build a picture of the portfolio trends. These trends are used to provide insight to and enable the Board to manage the risk appetite of the business.

Property Risk

The current upheaval in the property market is subject to many external economic and market factors which are cyclical in nature. The unprecedented turmoil in the financial markets has been reflected in the residential property market which has seen a period of rapid decline. This is reflected in terms of the paucity of transactions, the period of time taken to sell a property and the values being achieved. The primary cause is the substantial reduction in the availability of mortgage finance as major lenders have looked to repair their own balance sheets by limiting lending.

The inability of our clients to sell their underlying property assets and repay their loans has seen a substantial increase in the levels of non-performing loans. This has been heightened by the fact that many of our clients are property developers and have suffered severe working capital constraints. We have seen a large number of clients enter into formal insolvency processes.

The combination of these two factors has resulted in the Group becoming an Asset Manager as it has had to take "ownership" of the properties concerned. Ownership does not necessarily refer to actual legal ownership being instigated but the Group now has to manage the following:

*     Holding the property whilst a buyer is found

*     Maintenance of the property

*     Completion of developments where developers have ceased trading

*     Managing planning and building inspection sign off and related regulation

*     Managing the sales process via estate agents and direct approaches

This change in focus from property lender to property asset manager has given rise to additional risks, which are summarised below. The assessment of these risks and the implications on the short and medium term performance of the portfolio is discussed and managed at a weekly Property Committee meeting headed by the Chief Executive. The outcomes of this meeting are then reflected within the weekly cashflow meetings and ultimately reported to the Board on a monthly basis:

*     The market risk assesses the response to changes in the macroeconomic climate including buyer confidence and interest rate movements. The Property Committee considers key sales data across the portfolio e.g. sales rates, visitor levels, offers received and market intelligence obtained through the management of estate agents employed to action the disposal of various units. The Group recently employed the services of an experienced estate agent to manage the network of estate agencies being used across the country and take an active role in the sales process being adopted. Based upon this information consideration is given to the pricing of the sales units and whether price changes are required. The Committee is however focused on the need to retain value and not to dispose of the assets concerned through a distressed process unless all other avenues have been considered.
    
In addition to monitoring interest rate movements the Committee also actively monitors the availability of mortgage products, including buy to let, and which are being withdrawn / introduced to the market to assess availability of liquidity.

*     Construction / Regulation risk is the failure to meet planning requirements to ensure compliance with various permissions and guidance. The risk of not meeting prescribed development milestones and their impact on cost overruns and ultimately delayed future sales performance. The Group now employs experienced quantity surveyors and building project managers to assist in managing these risks.

*     Other risks include the Group now having to ensure insurance, health and safety and security requirements of its property assets are managed and controlled through specialist advisers.

Treasury Risk

The Group has categorised its treasury risk across the following elements: 

*     Liquidity risk, 

*     Financing risk

*     Market risk - interest rate and currency risk.

*     Counterparty credit risk

Liquidity Risk

This is the risk to both current and prospective earnings or capital arising from the Group's inability to meet its obligations when they become due without incurring unacceptable or unexpected losses. This may be despite the fact that the Group has adequate capital. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources due to changes in market conditions. Liquidity risk also arises from the failure to recognise or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value if necessary. 

The Group funds its business through syndicated and bilateral facilities with major UK and international banks. 

The Group maintains a formal treasury function via Davenham Treasury Services Limited. This manages the day to day treasury function, providing funding to, and taking surplus funds from, each of the Group business segments as required. The treasury function is charged with providing daily management information including short term funding requirements to enable the business to manage its daily liquidity requirements.

As explained in note 1 to the financial statements, a revised facility was agreed with the banks in March 2009. The facility contains certain covenant tests, which are based upon financial results prepared under UK GAAP including:

*     tangible net worth

*     net borrowings cover ratio

*     the actual amount of loan repayments in the property portfolio (as against their book values)

*     asset quality defined for product type

*     individual portfolio exposure levels, and

*     facility step-down levels

In addition other undertakings were given (including the need to obtain banking group consent to the payment of any dividends) that the Board considered acceptable and appropriate in the context of the new strategy.  

The covenant tests are reviewed by the Board on a monthly basis to assess the Group's performance against each of the covenants. 

The Group successfully met the facility step-down covenant test as at 30 June 2009 and is confident it will meet the next testing point at 30 September 2009. This has been despite the actual cashflows generated by the Property division being lower than originally forecast. However the quantum of the cash collected to date has been considerable, with approximately £57m having been collected from its realisation from October 2008 to date.

However, as discussed in note 1 to the financial statements, the directors consider is likely that the Group will breach some of the facility covenants in the current financial year.

Details of current bank facilities and their maturity dates are set out in note 14.

Interest Rate Risk

The Group's long standing treasury strategy is to minimise interest rate volatility from its bank borrowings. 

The Group looks to fix that element of its floating rate borrowings against its fixed rate lending thus locking in its profit element. 

The Group has minimal risk to revenue from changes in market interest rates as the majority of advances made to the Group's customers are at rates of interest that are fixed over the term of the contract. However, elements of the Trade finance portfolio are priced at floating rates and historically any impact to revenue from changes in market rates would be offset by a corresponding reduction in the cost of funding in relation to that element of the portfolio. The Group is currently locked into fixed rates of interest on its debt due to the excess swap portfolio which has resulted in the Trade portfolio suffering from reduced income on its floating rate lending following interest rate reductions whilst still incurring a fixed rate of borrowing at levels in excess of current market rates.

Funding facilities provided by the banking syndicate are at a floating rate. The Group was therefore exposed to the risk of rising interest rates. However this has been avoided through the use of financial hedging derivatives. The counterparties to these derivatives are from the top four of the Group's banking syndicate. The Group reviews on a regular basis counterparty credit risk; currently this is not considered a material risk to the business.

As a result of the Group using various financial derivatives, it limits exposure to movements in bank funding rates in the short to medium term. As at 30 June 2009, the Group had £210m of swap contracts in place against an initial £215m facility level. The covenanted step-down requirements of the facility to £90m by September 2010, will result in the Group having a number of swap contracts which will no longer remain effective for their remaining contractual periods. This will result in an over-hedged position at various points over the coming years. Therefore, during the year, the Group de-designated £105m of hedging relationships to reflect this.

The impact of these de-designations requires that the fair value of these contracts is recognised directly within the income statement and any future movements in these should also be passed directly through the income statement rather than the hedging reserve.

An independent valuation of the swap portfolio has now been undertaken which shows a negative fair value of the total portfolio of £9.8m as at 30 June 2009 (2008: positive fair value £2.8m. This represents a £12.6m reduction from 30 June 2008 position. However, of the £9.8m, only swaps with fair values of £6.8m are forecast to remain fully effective for their remaining lives and therefore £3.0m has been recognised as a charge within the income statement in the year. 

Given that this charge has arisen because of the requirement to down-size the Group, this cost has been treated as an exceptional item. 

It should be noted that this charge will be credited back into the income statement in future years as the lives of these swaps amortise. Given interest rates remain at all-time lows, in the event that rates harden during these remaining periods then the fair value of these swaps will improve and a credit back to the income statement will be seen.

The treasury function monitors interest rate movements advising the executive directors on a daily basis. The function also benefits from regular updates from the treasury departments of each of the leading banks within the syndicate keeping the Group advised of any movements within the capital markets and risk management products which may be of benefit to the Group.

Currency Risk

The Group has very little exposure to currency risk with all product foreign exchange transactional risk being the responsibility of the customer. However certain funding received or deposits held by the Group at times may not be in sterling. This creates a potential exposure to accounting risk of adverse changes in exchange rate movements on re-translation. As at 30 June 2009 the Group had foreign currency cash balances equivalent to £1.9m. The Group uses formal hedging techniques in the form of forward contracts where the Group acts as agent on behalf of its clients.

Capital Risk

The Group's objective when managing capital is to ensure it continues as a going concern as well as to provide a balance between financial flexibility and balance sheet efficiency. In determining its optimal capital structure, the Group considers the robustness of future cash flows, potential funding requirements, the cost of capital and ease of access to funding sources.

The Group is not subject to any external regulatory capital requirements. However the Group is required, under its banking agreement, to procure that the tangible net worth, (as defined by the banking agreement), of the Group as at 31 March 2010, and as at each quarter end thereafter, is greater than or equal to £20m, when accounted for under UK GAAP. This covenant has not yet reached its first testing point, however, at 30 June 2009, under UK GAAP, the Group achieved a tangible net worth of £27.1m.

The Group's equity together with a reconciliation to tangible net worth is shown below :

                                                              2009     2008
                                                             £'000    £'000
 Borrowings                                                181,586  219,225
 Less cash and cash equivalents                            (2,562)  (2,416)
 Net borrowings                                            179,024  216,809

 Total equity                                               10,922   58,208
 Adjustments :
 Own shares held reserve                                     1,507    1,507
 IFRS adjustments                                           14,638  (1,552)

 Tangible net worth (as defined by the banking agreement)   27,067   58,163

Operational Risk

This is the risk to earnings or capital resulting from inadequate or failed internal processes, systems and the actions of our people across the whole Group. The major areas of operational risk surround:

*     Dependence on key suppliers;

*     IT security;

*     Product documentation and execution;

*     Internal and external fraud;

*     Implementation of strategic change; and

*     Process errors.

The Group manages these risks through a variety of controls and processes, and mitigation actions including insurance. The implementation and monitoring of these actions are reviewed by each of the individual divisional risk functions which then report into Group Risk. 

External risk advice and support is provided in connection with human resources, health and safety and IT security including business continuity planning. Whilst the Group remains ultimately responsible for the management of these risks, the support and advice offered by these external advisers forms an important part of the risk management matrix. The Board is updated on a monthly basis regarding issues surrounding human resource and health and safety.

Strategic Risk 

This is the risk to earnings or capital through taking adverse business decisions, or the unsuccessful implementation of those decisions both in the short and long term. 

The Group's strategic vision, its current goals and its expectations relating to its future financial position involve risks and uncertainties which are dependent on future events and circumstances which may be beyond its control. These include, among others, UK economic and business conditions; market-related risks, such as fluctuations in interest rates; the impact of competition; and the timing, impact and other uncertainties of future mergers or combinations within relevant industries. 

In March 2009, the Group adopted its new strategy of focusing on its trade and asset portfolio whilst at the same time ceasing new facilities in property and recovering the current portfolio. This was supported by the banking group with the agreement of the Group's new two year financing facility.

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in its forward-looking statements. The Group undertakes no obligation to update the forward-looking statements contained in this document or any other forward-looking statement it may make.
      Consolidated Income Statement

for the year ended 30 June 2009

    
                                                                                            2009                                                      2008
                                 Notes    Before exceptional           Exceptional  Total  £*000    Before exceptional           Exceptional  Total  £*000
                                                  items£*000    items(Note 6)£*000                          items£*000    items(Note 6)£*000
 Revenue                             3                49,074                     -        49,074                53,148                     -        53,148
 Finance costs                       5              (15,907)                     -      (15,907)              (16,391)                     -      (16,391)
 Gross profit                                         33,167                     -        33,167                36,757                     -        36,757
 Administrative expenses                            (15,382)               (6,479)      (21,861)              (16,266)                 (318)      (16,584)
 Loan loss impairment               10              (66,713)                     -      (66,713)               (7,438)                     -       (7,438)
 Operating (loss)/profit before      6              (48,928)               (6,479)      (55,407)                13,053                 (318)        12,735
 taxation 
 Taxation                            7                12,986                 1,814        14,800               (3,980)                    89       (3,891)
 (Loss)/profit for the year         16              (35,942)               (4,665)      (40,607)                 9,073                 (229)         8,844
 after taxation
                                                                                                                                                          
 (Loss)/earnings per share                                                                                                                                
 - basic                             9             (145.15)p              (18.84)p     (163.99)p                36.67p               (0.92)p        35.75p
 - diluted                           9             (145.15)p              (18.84)p     (163.99)p                36.08p               (0.91)p        35.17p
                                                                                                                                                          
 Dividends per share                                                                                                                                      
 - Paid during the period            8                                                       Nil                                                    15.06p
 - Proposed *                        8                                                       Nil                                                     7.00p

* The 2008 proposed final dividend was withdrawn on 20 October 2008.

All results are from continuing operations.
      Consolidated Balance Sheet

as at 30 June 2009

                                                  Notes  30 June   30 June
                                                            2009      2008
                                                           £'000     £'000
 ASSETS
 Non-current assets
 Goodwill                                                  1,909     1,909
 Other intangible assets                                     415       780
 Property, plant & equipment                                 868     1,023
 Loans & advances to customers                     10     68,635    53,808
 Deferred taxation asset                           12     14,451     1,594
 Derivative financial instruments                            155     1,853
                                                          86,433    60,967
 Current assets
 Loans & advances to customers                     10    122,309   222,778
 Other receivables, prepayments & accrued income   11        827     1,151
 Derivative financial instruments                             63       995
 Cash and cash equivalents                         13      2,562     2,416
                                                         125,761   227,340
 Total assets                                            212,194   288,307

 LIABILITIES
 Current liabilities
 Borrowings                                        14     82,879     9,195
 Current tax liabilities                                   2,396     4,835
 Derivative financial instruments                          6,051        10
 Trade and other payables                          15      7,319     6,000
                                                          98,645    20,040
 Non-current liabilities
 Borrowings                                        14     98,707   210,030
 Derivative financial instruments                          3,920        29
                                                         102,627   210,059
 Total liabilities                                       201,272   230,099
 Net assets                                               10,922    58,208

 SHAREHOLDERS' EQUITY
 Share capital                                     16        261       261
 Share premium                                     16     26,528    26,528
 Own shares held reserve                           16    (1,507)   (1,507)
 Retained earnings                                 16    (9,884)    30,427
 Share based payment reserve                       16        406       477
 Hedging reserve                                   16    (4,882)     2,022
 Total Shareholders' equity                               10,922    58,208

The financial statements were approved by the board of directors on 29 September 2009 and were signed on its behalf by:

D R Coates

Director

      Consolidated Statement of Recognised Income & Expense

for the year ended 30 June 2009

                                                                    2009    2008
                                                                   £'000   £'000
 (Loss)/profit for the year                                     (40,607)   8,844
 Effective portion of changes in fair value of interest rate
 cashflow hedges:
 - fair value adjustment                                                        
 - tax on fair value adjustment                                  (9,590)   1,309
                                                                   2,686   (367)
 Net (losses)/gains recognised directly in equity               (47,511)  9,786 

There are no movements to be recognised through the parent company Statement of Recognised Income and Expense in 2009 or 2008.

Consolidated Cash Flow Statement

for the year ended 30 June 2009

                                                         Notes     2009     2008
                                                                  £'000    £'000
 Cash flows from operating activities
 Cash generated from operations                             17    5,414    3,206
 Tax repaid/(paid)                                                2,188  (1,915)
 Net cash inflow from operating activities                        7,602    1,291

 Cash flows from investing activities
 Acquisition of business and subsidiary undertakings                       (240)
 net of cash acquired                                                 -
 Purchase of property, plant and equipment                        (113)    (168)
 Purchase of intangible assets                                     (43)    (261)
 Proceeds from sale of property, plant and equipment                 16        4
 Net cash outflow from investing activities                       (140)    (665)

 Cash flows from financing activities
 Proceeds from issue of share capital                                 -       26
 Dividends paid to shareholders                              8        -  (3,724)
 Net cash outflow from financing activities                           -  (3,698)

 Net increase / (decrease) in cash and cash equivalents           7,462  (3,072)
 Cash and cash equivalents at 1 July                            (6,779)  (3,707)
 Cash and cash equivalents at 30 June                               683  (6,779)

 For the purposes of the cash flow statement, cash and
 cash equivalents comprise:
 Cash at bank and in hand                                   13    2,562    2,416
 Bank overdrafts included within current borrowings         14           (9,195)
                                                                (1,879)
                                                                    683  (6,779)

      Notes to the Financial Statements

for the year ended 30 June 2009

1. Basis of preparation 

Basis of accounting 

These consolidated and Company financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International Accounting Standards Board.

These consolidated and Company financial statements have also been prepared in accordance with the Companies Act 2006 as applicable to companies reporting under IFRS.

Basis of preparation 

These financial statements have been prepared under the historical cost convention, as modi*ed by the revaluation of derivative *nancial instruments. 

The financial statements have been prepared in accordance with the accounting policies described in note 2 below.  

Standards, amendments and interpretations that are not yet effective and have not been early adopted

The following standards, amendments and interpretations to existing standards have been published and are mandatory for accounting periods beginning on or after 1 January 2009 or later periods, but which the Group and the Company have not early adopted.
        

*     IAS 1 'Presentation of Financial Statements (Revised)' - this will revise the presentation of the financial statements including a single statement of comprehensive income or a separate income statement and a statement of comprehensive income with a statement of movements in reserves. Adopting this change would only result in a presentational change to the financial statements. There will be no change in the recognition, measurement or disclosure of transactions and events.

*     IFRS 8 'Operating segments' - it is not expected that this standard, which is effective for the Group from 1 July 2009, will significantly impact on the Group's segmental disclosures.

*     Amendment to IAS 23 'Borrowing costs' - it is not expected that this amendment, which is effective from 1 July 2009, will have an impact on the Group or Company's result as the Group's existing accounting policy requires that borrowing costs relating to assets in the course of development are capitalised as part of the asset's costs rather than expensed.

*     IFRS 2 'Share based payments' (amended) - it is not expected that this standard, which is effective from 1 July 2009, will have a material impact on the share based payments incurred by the Group.

*     Amendment to IFRS 7 'Financial Instruments: disclosures' - the amendment clarifies and enhances disclosures about fair value measurements and the liquidity risk of financial instruments. We expect the amendment will result in further changes and enhancements to the risk disclosures.

*     Improvements to IFRSs (May 2008) - several small amendments with no significant impact for the Group.

Other new standards, amendments and interpretations have been considered but are not deemed to be relevant to the Group.

Going concern

Company Law requires the Directors to prepare financial statements that give a true and fair view of the state of the affairs of the Company and the Group and of the profit or loss of the Group for the period under review. Fundamental to this requirement is that the Directors assure themselves that it is reasonable for them to conclude that it is appropriate to prepare the financial statements on a going concern basis.

The financial statements of the Group have been prepared on a going concern basis, which assumes that the Group will continue to be able to meet its liabilities as and when they fall due, for the foreseeable future.  

In March 2009 Davenham agreed a new two year £215m facility which was tailored to support the Group's revised strategy ensuring the working capital requirements of the asset and trade divisions were met whilst reflecting the recovery of cash from the downsizing of the property loan book. 

However, in the sectors in which the Group operates, especially in relation to the property market, economic conditions have declined since issuing the Group's interim results on 26 March 2009. The Group has generated lower than forecast cash inflows from its property division whilst also incurring higher than forecast impairment levels.

In conjunction with its advisors, the Board has recently undertaken a thorough review of the Group's forecasts, which extend beyond one year from the date of approval of these financial statements and take account of the impact of the principal risks and uncertainties set out on pages 12 to 18. The forecasts make assumptions in respect of future trading conditions, most notably in respect of the economic environment and its impact on the Group's revenues and costs. In addition to this, the nature of the Group's property division in the current environment is such that there can be considerable variation in the timing of cash inflows. The forecasts take into account foreseeable downside risks based upon on the information that is available at the time of approval of these financial statements and indicate that the property division will continue to generate lower than originally forecast cash inflows but reflect positive contribution levels from both the trade and asset portfolios in line with its new strategy.

In addition the high level of non-performing debt and a forecast inability to recover property loans through the realisation of security as quickly as originally forecast will result in a burden of finance costs being higher than originally forecast.

The debt burden is further impacting on the Group's profitability through the carrying of its swap portfolio. The Group adopted a traditional approach to its treasury management over the past three years seeing a swap portfolio being built up of varying amounts reflecting movements in the market. The strategy of the Group was to ensure the interest rate risk in relation to its fixed rate lending portfolios ie Property and Asset were mitigated through the use of fixed interest rate swaps. This of course was predicated upon the Group's portfolio remaining at or above levels during 2007/08 and that the Group would not be faced with the current run down situation of its property portfolio.

The Group has therefore suffered both from being locked into funding cost rates in excess of current market rates (swapped at a weighted average of 5.5% vs 1% LIBOR) and also being an in over-hedged position whereby the notional swap values are in excess of the Group's debt levels.

Based upon these forecasts a breach of certain of the Group's covenants is likely in the current financial year. One of the key banking covenants relates to the quarterly step-downs of the Group's facility from £215m to £90m by 30 September 2010. In addition the Group also has a tangible net worth covenant, calculated under UK GAAP, which requires the Group to have a tangible net worth (as defined in the banking agreement) equal to or in excess of £20m as from the first testing point of 31 March 2010 and then quarterly thereafter.

Failure of a covenant test would render the facilities in default and repayable on demand at the option of the lenders, if an amendment or waiver is not granted by the lenders in advance. The granting of a waiver requires consent by 66.67% of the banking group. Such a majority can be achieved through the support of the two lead banks plus one other member of the remaining six banks in the syndicate. 

The Group reports on its trading performance and covenant compliance (whether tested or not) on a monthly basis. The two lead banks are also given a monthly update through meetings with the senior management team. In addition, the banks have the option to attend the monthly portfolio meetings enabling them to assess firsthand the performance of the various product groups. The Group was compliant with its banking covenants as at 30 June 2009 and remains compliant as at the date of approval of the financial statements, including the 30 September 2009 testing point. The principal financial covenants are due to be tested again as at 31 December 2009 and 31 March 2010.

The Group has proactively entered into detailed on-going discussions with the Banking Group to consider various strategic options on behalf of stakeholders. The options being considered may see the acceleration of cash inflows via asset sales or through access to new forms of funding. In addition the Board may consider proposing an amendment to the terms of the current funding facility primarily in relation to its current covenant testing. The Board is currently reviewing in detail (together with the Company's advisers) the feasibility of various options, prior to deciding which to pursue. 

Although the Directors remain confident of a successful outcome for at least one of the strategic options that it is considering, they have concluded that, given the current economic circumstances, that success is not entirely within the Company's control, indicating a material uncertainty which may cast significant doubt on the Group's and the Company's ability to continue as a going concern. If this is the case, the Group and the Company may be unable to continue to realise assets and discharge liabilities in the normal course of business. These financial statements do not include any adjustments that would result from the going concern basis of preparation being inappropriate.

Use of assumptions and estimates

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised.
    
    

Estimates and judgements made by management in the application of IFRS that have a significant effect on the financial statements are :

    

IAS 39 'Financial Instruments : Recognition and Measurement'

The Group reviews its loans and receivables on an ongoing basis to assess the level of impairment. Future cash flows are estimated on the basis of the contractual cash flows of the assets and historical loss experience. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. To the extent that the net present value of estimated future cash flows differs by +/-1%, the loan loss provision in the balance sheet would be an estimated £1.2 million lower/higher (2008: £0.3 million lower/higher).

    

IAS 36 'Impairment of assets' 

Determining whether goodwill is impaired requires an estimation of the value in use of the CGU's to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the CGU's and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the balance sheet date was £1.9 million (2008: £1.9 million).  

      IAS 12 'Income taxes'

In applying the Group's accounting policy in relation to deferred tax, as set out below, the Directors are required to make assumptions regarding the Group's ability to utilise historical tax assets following an assessment of the likely quantum and timing of future taxable profits. A deferred tax asset is recognised to the extent that the Directors are confident that the Group's future profits will utilise historical tax assets.

2. Accounting Policies 

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these group financial statements.

Basis of consolidation 

A business combination is recognised where separate entities or businesses have been brought together within the Group. Subsidiaries are all entities over which the Group has the power to govern the *nancial and operating policies so as to obtain bene*ts from its activities. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. 

The purchase method of accounting is used to account for business combinations made by the Group. The cost of a business combination is measured as the fair value of the assets acquired and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the business combination. 

Identifiable assets, liabilities and contingent liabilities acquired in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill.  

Intra group transactions, including income and profits, are eliminated fully on consolidation.  
    
Segmental reporting 

A business segment is a distinguishable component of the Group that provides products that are subject to risks and returns that are different from those of other business segments. For management purposes, the Group is organised into three operating segments: Property Finance, Trade Finance and Asset Finance. Management believe that there is only one geographical segment, being the UK market.

Financial assets 

Management determines the classi*cation of the Group's *nancial assets at initial recognition into one of the following categories:

Loans and receivables 

Loans and receivables are non-derivative *nancial assets with *xed or determinable payments that are not quoted in an active market. They arise when the Group provides money directly to a customer with no intention of trading the receivable. Loans and receivables are initially recorded at fair value including any transaction costs and are subsequently measured at amortised cost using the effective interest rate (EIR) method.

Financial assets at fair value through pro*t or loss 

This category comprises derivatives that are not designated as hedges, and any financial assets that are designated as fair value through the profit and loss on inception. These financial assets are initially recognised at fair value, with transaction costs recorded immediately in the income statement, and are subsequently measured at fair value. Gains and losses arising from changes in fair value are recognised in the income statement.

Held-to-maturity 

Held-to-maturity investments are non-derivative *nancial assets with *xed or determinable payments and *xed maturities that the Group has a positive intention and ability to hold to maturity. Were the Group to sell a signi*cant amount of held-to-maturity assets the entire category would be tainted and reclassi*ed as available-for-sale. 

Available-for-sale 

Available-for-sale investments are those intended to be held for an inde*nite period of time, which may be sold in response to needs for liquidity or changes in interest rates. 

The Group has not held any held-to-maturity investments or available-for-sale *nancial assets at any point during the reporting periods. 

Revenue recognition 

Revenue comprises the fair value of the consideration received or receivable, net of value added tax, and is recognised as follows: 

Interest and similar income 

Interest income is recognised in the income statement for all financial assets measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period. The effective interest rate ('EIR') is the rate that exactly discounts estimated future cash receipts through the expected life, or contractual term if shorter, of the financial asset to the net carrying amount of the financial asset. When calculating the EIR, the Group estimates cash flows considering all contractual terms of the financial instruments, such as early settlement income, but does not include an expectation for future credit losses. The calculation includes all fees charged to customers, such as acceptance or similar fees and direct and incremental transaction costs, such as broker commissions. 

Amounts due from lessees under *nance leases and hire purchase contracts are recorded as receivables at the amount of the Group's net investment in the contract. Finance income is allocated to accounting periods so as to re*ect a constant periodic rate of return on the Group's net investment (before tax) outstanding in respect of the lease. 

Interest income continues to be recognised at the EIR once a *nancial asset or a group of similar *nancial assets has been written down as a result of an impairment loss, irrespective of the terms of the loan and whether interest has been suspended on the customer's account. A gross-up adjustment to income is offset by a corresponding gross-up adjustment to the loan loss charge (refer to the accounting policy entitled 'Impairment of loans and receivables'). 

Fee and commissions income

The Group earns fee income from services provided to clients. Fee income can be divided into two broad categories, fees earned from services that are provided over a period of time which are recognised over the period in which the service is provided, and fees that are earned on the completion of a significant act or on the occurrence of an event such as the completion of a transaction, which are recognised when the act is completed or the event occurs. 

Fees and commissions that are an integral part of a loan or receivable are deferred (together with related direct costs) and recognised over the life of the agreement as an adjustment to the effective interest rate.

Impairment of loans and receivables 

In respect of loans and receivables, the Group assesses on an ongoing basis whether there is objective evidence that a loan asset or a group of loan assets is impaired. A loan asset or a group of loan assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and the loss event has an impact on the estimated future cash *ows of the loan asset or group of loan assets that can be reliably estimated. 

The Group reviews its leasing and loan portfolios to assess impairment at least on a monthly basis. In determining whether an impairment loss is to be recorded in the income statement the Group makes judgements as to whether there is observable data indicating that there is a measurable decrease in the estimated cash flows from an individual lease or loan. This evidence can be as a result of non-payment or other evidence of a deterioration of the financial status of the customer. The Group takes account of the value of collateral held and also any movements in market conditions that impact on the value of collateral when calculating the level of impairment loss to be charged to the income statement.

The Group *rst assesses whether objective evidence of impairment exists individually for loan assets that are individually signi*cant, and either individually or collectively for loan assets that are not individually signi*cant. 

If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash *ows, excluding future credit losses that have not been incurred, discounted at the loan asset's original EIR. The carrying amount of the asset is reduced through the use of a loan loss provision. The amount of the loss is recognised in the income statement. 

For the purposes of a collective evaluation of impairment, loan assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows for a group of loan assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

The accuracy of the allowances and provisions made depends on how accurately the Group estimates future cash flows for specific counterparty allowances and provisions and the model assumptions and parameters used in determining collective allowances. While this necessarily involves judgement, the Group believes that its allowances and provisions are reasonable and supportable.

Where interest income continues to be recognised on impaired loans, which cannot be collected from the customer due to the interest being *xed at the outset or interest having been suspended on the customer's account, referred to as the 'gross-up adjustment' to income, a corresponding loan loss charge is made. 

Impairment of non-financial assets

Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

      Interest payable

Interest payable is stated after charging amortisation of loan arrangement fees. Loan arrangement fees are deducted from the liability recorded in the balance sheet and amortised over the life of the relevant arrangement.

Operating leases - as lessee

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases are charged to the income statement on a systematic straight line basis over the period of the lease.

Foreign currency  

The Group's *nancial statements are presented in Pounds Sterling, which is the Group's functional and presentational currency. All subsidiaries of the Group have Pounds Sterling as their functional currency. Foreign exchange gains and losses resulting from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement as part of administrative expenses. 

Exceptional Items

Exceptional items are those significant items which are separately disclosed by virtue of their size or nature to enable a full understanding of the Group's financial performance, and are shown separately on the face of the income statement. 

Intangible assets 

Goodwill and Other Intangible Assets

Goodwill arising on acquisition represents the excess of the cost of a business combination over the fair values of the Group's share of the identi*able net assets acquired. Goodwill is not amortised, but is reviewed annually for impairment. Any impairment is recognised immediately through the income statement and is not subsequently reversed. 

Other intangible assets, including customer relationships, are valued on acquisition and shown separately from goodwill. These intangibles are amortised over their estimated useful lives (5 - 10 years).

Computer software 

Acquired software licenses are capitalised as intangible assets and amortised over their useful lives, 3 years, on a straight line basis. 

Costs that are directly attributable with the creation of identi*able software, which meet the development asset recognition criteria as laid out in IAS 38 'Intangible assets', are recognised as internally generated intangible assets. 

Direct costs include the employment costs of internal software developers, consultancy costs and borrowing costs. Borrowing costs are capitalised until such time as the internally generated software is substantially ready for its intended use. 

Computer software development costs recognised as assets are amortised over their estimated useful lives (3 years) on a straight line basis. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 

All other software development and maintenance costs are recognised as an expense as incurred. 

      Property, plant and equipment 

Property, plant and equipment is stated at cost less accumulated depreciation. Cost represents expenditure that is directly attributable to the purchase of the asset.

Land and buildings are not subject to regular revaluations. 

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic bene*ts associated with the items will *ow to the Group and the cost of the item can be measured reliably. 

Land is not depreciated. Depreciation on other assets is calculated using the straight line basis on tangible fixed assets at rates calculated to write off the assets over their anticipated useful lives as follows: 

Freehold buildings                               50 years

Fixtures and fittings                             4 - 5 years

Computer and ancillary equipment        3 years

Motor vehicles                                    4 years 

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 

Gains and losses on disposals are determined by comparing proceeds with carrying amounts and are included in the income statement. 

Investments in subsidiary undertakings

Investments in subsidiary undertakings are initially and subsequently recognised at cost. The Company recognises income from the investment only to the extent that it receives distributions from post-acquisition accumulated profits. Distributions received in excess of such profits are regarded as a recovery of investment and recognised as a reduction in the cost of the investment.

At each reporting date, an assessment is made as to whether there is any indication that the investment may be impaired. If such an indication exists, the Company estimates the investment's recoverable amount. The investment is written down to the recoverable amount if this is lower than its carrying value. The impairment loss is recognised in the Company's income statement. 

Cash and cash equivalents 

For the purposes of the cash *ow statement, cash and cash equivalents includes cash in hand, deposits held with banks, which have a residual maturity of 3 months at the date of acquisition, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. 

Employee bene*ts 

Pension obligations 

The Group operates a money purchase pension scheme for the members of the Group. The assets of the scheme are held separately from those of the Group in independently administered funds. The pension cost charge represents contributions payable by the Group to the scheme. 

The Group provides no other post-retirement bene*ts to its employees or directors. 

Share-based payments 

The Group operates a number of share based payment award schemes. The fair value of the options is measured at grant date and spread over the vesting period through the Income Statement with a corresponding increase in equity. The fair value of the share options and awards are measured using an option-pricing model taking into account the terms and conditions of the individual schemes. The fair value of the options awarded under the schemes with market based performance conditions is estimated using a Monte-Carlo simulation model. The fair value of options awarded under schemes with market and non-market based performance conditions is estimated using the Binomial and Black-Scholes models respectively.

The Group makes charges to the income statement for employer's National Insurance liabilities on options granted as incurred.

Borrowings 

Borrowings include bank borrowings and other borrowings, overdrafts and obligations under finance leases and hire purchase contracts. 

Bank borrowings and other borrowings are recognised initially at fair value, being their issue proceeds net of any transaction costs incurred. These borrowings are subsequently stated at amortised cost; any difference between the proceeds, net of transaction costs, and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. 

Current tax 

The charge for current tax is based on the results for the period as adjusted for items which are non-assessable or disallowed. It is calculated using rates of tax that have been enacted by the balance sheet date. 

Deferred tax 

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the *nancial statements. 

Deferred tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. 

Deferred tax is determined using tax rates and laws that have been enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. 

Deferred tax assets are recognised to the extent that it is probable that future taxable pro*t will be available against which the temporary differences can be utilised. 

Share capital 

Ordinary shares are classi*ed as equity. 

Shares are recorded at their nominal value with any surplus received on their issue taken to the share premium account. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. 

Where any group company purchases the Company's equity share capital, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders, via the own shares held reserve, until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders.

Dividend distribution 

Final dividends payable to the Group's shareholders are recognised in the Group's *nancial statements in the period in which the dividends are approved by the Group's shareholders. Interim dividends payable are recognised in the period in which the dividends are paid. 

Derivative *nancial instruments and hedging activities 

Derivatives are initially recognised at fair value on the date the derivative contract is entered into and are subsequently re-measured at fair value. The fair value of derivatives is determined by using a valuation model and is primarily based on observable market data. The method of recognising the resulting gain or loss from the re-measurement depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. 

The Group's policy is to designate derivatives on the date that the derivative contract is committed to. The Group designates its derivatives as a hedge of the variability of cash flows associated with highly probable forecast transactions and recognised assets and liabilities ('cash *ow hedging instrument'). 

To qualify for hedge accounting, the Group is required, at inception, to document prospectively the relationship between the item being hedged and the hedging instrument. The Group is also required to document and perform an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective in offsetting changes in cash *ows of the hedged item on an ongoing basis. This effectiveness testing is re-performed at each reporting date to ensure that the hedge remains highly effective. 

The effective portion of changes in the fair value of derivatives designated as cash *ow hedging instruments is recognised in equity within the hedging reserve. The change in the fair value relating to the ineffective portion is recognised immediately in the income statement within *nance costs. 

Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect pro*t, i.e. when the forecast interest payment that is hedged is expensed. 

When a cash *ow hedging instrument expires or is sold, or when a cash *ow hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued prospectively. Any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. 

3. Revenue 

                                                          2009    2008
                                                         £'000   £'000
 Interest and similar income receivable from customers  46,088  47,103
                       Fees and commissions income       2,986   6,045
                                                        49,074  53,148

Interest and similar income includes the 'gross-up adjustment' of £17,469,000 (2008: £3,662,000) (note 10). The 2008 split between interest and similar income, and fees and commissions income has been restated to ensure that there is a consistent methodology of splitting revenue between the current and prior year.

4. Segmental information

A business segment is a distinguishable component of the Group that provides products that are subject to risks and returns that are different from those of other business segments. For management purposes the Group is organised into three operating segments: Property Finance, Trade Finance and Asset Finance.  

      The segmental income and results for the year ended 30 June 2009 and segment assets and liabilities as at that date are as follows:

                       Property    Trade   Asset 
                        finance  finance  finance  Central     Group
                          £'000    £'000    £'000    £'000     £'000
 Income             
 Revenue                 27,534   10,358   11,182        -    49,074
 Finance costs         (10,554)  (2,683)  (4,426)    1,756  (15,907)
 Gross Profit            16,980    7,675    6,756    1,756    33,167
 Result             
 Segment result        (40,534)    (464)  (4,712)  (3,218)  (48,928)
 Exceptional items                                           (6,479)
 Taxation                                                     14,800
 Loss for the financial year                                (40,607)

Included within the exceptional items of £6,479,000 are redundancy costs relating to property of £193,000, trade of £78,000 and asset of £92,000. The remaining exceptional items are in the central segment.

                                              Property    Trade   Asset 
                                               finance  finance  finance  Central    Group
                                                 £'000    £'000    £'000    £'000    £'000
 Segment assets and liabilities
 Segment assets
 Total assets                                  110,071   27,666   53,207   21,250  212,194
 Segment liabilities                                                             
 Total liabilities                             103,593   26,038   50,076   21,565  201,272

 Other segment items
 Capital expenditure                                40       40       40       36      156
 Depreciation                                       46       46       46       26      164
 Amortisation - other intangible assets             70       67      134       47      318
 Loan loss charge                               54,398    4,082    8,233        -   66,713

The loan loss charge includes the 'gross-up adjustment' of £17,469,000 (note 10).

Capital expenditure comprises additions to property, plant and equipment and intangible assets.

Each of the trading divisions is provided with funding for its gross portfolio from Davenham Treasury Services Ltd against which a deduction is made for a pro-rata divisional share of the Group's equity base, calculated by reference to portfolio size, giving rise to a divisional 'net debt' position. Each division is then charged interest by Davenham Treasury Services Ltd on its net debt at a rate equivalent to that charged to the Group on its external borrowings.

This basis of interest calculation gives rise to resultant credit in Davenham Treasury Services Ltd primarily due to the level of provisions, which are not deducted from divisional portfolio balances but are of course reflected in the Group's equity position, thus resulting in the trading divisions incurring interest costs in relation to their non-performing/provisioned accounts.

      The segmental income and results for the year ended 30 June 2008 and segment assets and liabilities as at that date are as follows:

                                         Property    Trade   Asset 
                                          finance  finance  finance  Central     Group
                                            £'000    £'000    £'000    £'000     £'000
 Income
 Revenue                                   29,273   12,187   11,688        -    53,148
 Finance costs                            (7,668)  (2,530)  (5,634)    (559)  (16,391)
 Gross Profit                              21,605    9,657    6,054    (559)    36,757
 Result
 Segment result                           12,583     4,036    1,245  (4,811)    13,053
 Exceptional items                                                               (318)
 Taxation                                                                      (3,891)
 Profit for the financial year                                                   8,844
                                                                                      
                                         Property    Trade   Asset 
                                          finance  finance  finance  Central     Group
                                            £'000    £'000    £'000    £'000     £'000
 Segment assets and liabilities
 Segment assets                          154,644   50,567   71,375   11,721    288,307
 Total assets                                                                  288,307
 Segment liabilities                     117,431    38,399   54,200  20,069    230,099
 Total liabilities                                                             230,099

 Other segment items
 Capital expenditure                           99       99      135       96       429
 Depreciation                                  50       50       50       47       197
 Amortisation - other intangible assets        57       57      107       56       277
 Loan loss charge                           4,382    1,473    1,583        -     7,438

The loan loss charge includes the 'gross-up adjustment' of £3,662,000 (note 10).

Capital expenditure comprises additions to property, plant and equipment intangible assets.

All of the exceptional items included above relates to the central segment.

The amount included as segment liabilities within the three trading divisions represents the total external bank borrowings. These have been allocated on a weighted average basis by reference to loan portfolio sizes.

Management believe that there is only one geographical segment, being the UK market.

5. Finance Costs

                                             2009     2008
                                            £'000    £'000

Interest on bank loans and overdrafts  12,715   17,451
 Interest payable / (receivable) on swaps   3,192  (1,060)

                                           15,907   16,391

      6.     Operating (loss)/profit

                                                                     2009   2008
                                                                    £'000  £'000

Operating (loss)/profit is stated after charging/(crediting):
                                      Depreciation for the period     164    197
                                            Loan loss provisions*  66,713  7,438
                            Loss on disposal of intangible assets      91      -
       Loss/(profit) on disposal of property, plant and equipment      90    (4)
                                         Operating lease payments     245    265
                                Amortisation of other intangibles     318    277

           Exceptional costs relating to redundancy & refinancing   3,467      -
 Exceptional costs relating to loss on de-designation of interest   3,012      -
                                                       rate swaps
                        Exceptional costs relating to bid defence       -    318

                                          Total exceptional costs   6,479    318
        

* The loan loss provisioning charge includes £17,469,000 (2008: £3,662,000) in respect of the 'gross-up adjustment' (note 17).

The Group's definition of exceptional items is disclosed in note 2.

In view of the significant shift in market conditions, the Group implemented a number of restructuring initiatives, leading to costs in respect of banking, office closures and redundancies. These costs totalled £3,467,000.

In addition and directly linked to the Group's requirement under its new banking agreement to reduce levels of outstanding debt, the Group has incurred a charge in relation to fair value movements on interest rate swaps which no longer qualify for hedge accounting of £3,012,000.

                                                                     2009   2008

Services provided by the company's auditor and its associates:  £'000  £'000

During the year the group obtained the following services from
                         the Company's auditor and its associates:

Fees payable to the Company's auditor for the audit of parent    124    106
                                 company and consolidated accounts
      Fees payable to the company's auditor and its associates for
                                                   other services:
       The audit of company's subsidiaries pursuant to legislation     17     13
                                                     Tax services      29      2
                                                   Other assurance     45     47

      7. Taxation

7    (a) Analysis of tax (credit)/charge in the period

                                                                     2009   2008
                                                                    £'000  £'000
                                                    Current tax

- United Kingdom corporation tax on (losses)/profits of the      (32)  4,545
                                                     period    
               - Adjustments in respect of previous periods       (4,597)      -
                                              Total current tax   (4,629)  4,545
                                                   Deferred tax
                              Current year deferred tax expense   (7,740)  (592)
                         Adjustment in respect of prior periods   (2,431)  (192)
                                             Change in tax rate         -    130
                                               Deferred tax      (10,171)  (654)
 Tax (credit)/charge on (loss)/profit on ordinary activities     (14,800)  3,891

The tax on the Group's (loss)/profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to (losses)/profits of the consolidated entities as follows:

7    (b) Factors affecting tax (credit)/charge for the period

                                               2009    2008
                                              £'000   £'000

                 (Loss)/Profit before tax  (55,407)  12,735

 at the UK tax rate of 28.0% (2008:29.5%)  (15,514)   3,757
                Income not subject to tax         -    (12)
 Expenses not deductible for tax purposes       103     173
   Adjustment in respect of prior periods   (7,028)   (192)
                      Losses carried back     7,639       -
        Change in tax rate - current year         -      35
          Change in tax rate - prior year         -     130
   Total tax (credit)/charge for the year  (14,800)   3,891

The standard rate of current tax for the year is 28% (2008: 29.5% - based on the weighted average, which reflects the reduction in the rate of UK standard rate corporation tax to 28%, effective from 1 April 2008, and which is deemed an appropriate 'standard' rate of tax for the Group).

8. Dividends

                                                         2009   2008
                                                        £'000  £'000

  Ordinary shares - Final 2007 paid - 10.38p per share      -  2,701
 Ordinary shares - Interim 2008 paid - 4.68p per share      -  1,219
                                                            -  3,920

The Directors do not propose to pay dividends in respect of the 2009 financial year.

Included in the dividend payment of £3.9m in 2008 are dividends of £0.2m which were paid to the Employee Benefit Trust.
    
 9.     Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding own shares held which are treated, for this purpose, as being cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares.

                                                          2009                                             2008
                                               Weighted average                                Weighted average
                                             number of shares                                 number of shares 
                                                           '000                                            '000

                                                                 Loss per share                                  Earnings per share
                                                                          pence                                               pence
                                     Loss                                        Earnings
                                    £'000                                           £'000

Shares in issue during the                          26,061                                          26,061
                           year
                Own shares held                         (1,299)                                         (1,321)
                      Basic EPS  (40,607)                24,762        (163.99)     8,844                24,740               35.75
  Effect of dilutive securities
                              :         -                     -                         -                   408              (0.58)
                        Options
                                                                              -
                    Diluted EPS  (40,607)                24,762        (163.99)     8,844                25,148               35.17

10. Loans and advances to customers

Credit risk

Credit risk in relation to loans and receivables is the risk that financial loss arises from the failure of a customer to meet their obligations under a loan agreement.

A description of the Group's objectives, policies and processes for managing credit risk and how it is measured is set out in the Business Review on pages 17 to 19 in the section entitled 'Credit risk'. Details are also given in relation to the concentration risk associated with the Group's receivables in the section entitled 'Concentration risk' on page 17.

Maximum exposure to credit risk

The maximum exposure to credit risk of the Group's loans and receivables is set out in the table below:

                                 2009      2008
                                £'000     £'000
 Group
 Property Finance             110,071   154,644
 Trade Finance                 27,666    50,567
 Asset Finance                 53,207    71,375
 Total loans and receivables  190,944   276,586
 Comprising:
 Current assets               122,309   222,778
 Non-current assets            68,635    53,808
                              190,944   276,586

Other financial assets subject to credit risk include derivative financial instruments of £218,000 (2008 : £2,848,000), other debtors of £418,000 (2008 : £365,000) and cash and cash equivalents of £2,562,000 (2008 : £2,416,000). These are subject to a maximum exposure to credit risk equal to their carrying value.

Credit quality

A summary of the arrears status of the Group's loans and receivables, by class, is shown below as at 30 June 2009 and 30 June 2008:

                                                                     
                                Property    Trade    Asset 
 Group                            Finance  Finance  Finance     Total
 2009                               £'000    £'000    £'000     £'000
 Neither past due nor impaired     15,689   25,632   46,136    87,457
 Past due but not impaired          1,852        9    3,870     5,731
 Impaired                         132,332    4,941    8,745   146,018
 Outstanding customer balance     149,873   30,582   58,751   239,206
 Unamortised fees and costs           (4)        -    (135)     (139)
 Gross loans and receivables      149,869   30,582  58,616    239,067
 Loan loss provision             (39,798)  (2,916)  (5,409)  (48,123)
 Total loans and receivables      110,071   27,666  53,207    190,944

                                                                    
                                Property     Trade   Asset 
 Group                            Finance  Finance  Finance    Total
 2008                               £'000    £'000    £'000    £'000
 Neither past due nor impaired     99,590   47,183   62,059  208,832
 Past due but not impaired         28,667      875    5,456   34,998
 Impaired                          29,597    3,810    4,879  38,286 
 Outstanding customer balance     157,854   51,868   72,394  282,116
 Unamortised fees and costs          (60)        -      235      175
 Gross loans and receivables      157,794   51,868   72,629  282,291
 Loan loss provision             (3,150)   (1,301)  (1,254)  (5,705)
 Total loans and receivables      154,644   50,567   71,375  276,586

Loans and receivables - past due but not impaired

                                                             
                           Property     Trade    Asset
 Group                       Finance  Finance  Finance  Total
 2009                          £'000    £'000    £'000  £'000
 Past due up to 31 days           72        9    2,460  2,541
 Past due 32-65 days             384        -      870  1,254
 Past due 66-95 days             145        -      251    396
 Past due 96 days or more      1,251        -      289  1,540
 Total                         1,852        9    3,870  5,731

                                                               
                           Property     Trade    Asset
 Group                       Finance  Finance  Finance    Total
 2008                          £'000    £'000    £'000    £'000
 Past due up to 31 days       11,480      403    3,990   15,873
 Past due 32-65 days           7,649        -      978    8,627
 Past due 66-95 days           1,559      236       25    1,820
 Past due 96 days or more      7,979      236      463    8,678
 Total                        28,667      875    5,456  34,998 

Renegotiated loans and receivables

In Property, Trade and Asset renegotiated loans that would otherwise be past due or impaired totalled £nil, £nil and £1.5m at 30 June 2009 (2008: £1.0m, £nil and £2.6m) respectively.

Collateral

The Group holds collateral in relation to its loans and receivables, further details of which are provided below:

In accordance with IFRS 7 paragraph 36(b), as at 30 June 2009 the Group has not disclosed the fair value of the collateral held as security in respect of its hire purchase or lease receivables on the basis that it would be impractical to do so and instead provided below is an explanation of the nature of the collateral held. It would be impractical to fair value the collateral held because information on the current value of customers' assets and first charge liabilities is not maintained for all past due loans.  

*     Property loans

Secured property loans were underwritten based upon equity in the asset and the customer's financial standing. A first legal charge was secured and registered against the customer's property, to ensure that the customer prioritises repayments of the secured loan. In many instances additional security was obtained in the form of personal guarantees and second and third ranking charges against other residential and commercial property.

The fair value of the collateral for all past due loans approximates to the carrying value of such loans.

*     Hire purchase & Lease

The majority of facilities provided for the acquisition of plant, vehicles and machinery are written on lease and unregulated hire purchase agreements. These can be terminated in the event of default. If this occurs, the assets financed can be immediately repossessed and disposed.

The terms of a regulated hire purchase contract allow the customer to voluntarily terminate and allow the Group to repossess the asset, both subject to meeting certain criteria.

A customer may voluntarily terminate the hire purchase contract provided they have paid at least 50% of the contract and have not received a notice of default. In this instance the asset is returned and disposed of, with the proceeds offset against the customer's outstanding balance.  

Legally, the Group may repossess a vehicle financed on a regulated hire purchase contract, provided the customer has paid less than one third of the contract and a notice of default has been issued. The Group endeavour to negotiate arrangements with the customer to avoid the need for repossession. Vehicles that are repossessed are promptly disposed of at auction and the proceeds offset against the customer's outstanding balance. The customer is liable for any remaining balance.

The only way of estimating the fair value of used assets on hire purchase and lease would be on an aggregate basis which may result in the collateral disclosure being misleading when some loans in the portfolio are over collaterised and other loans have insufficient collateral. In these circumstances netting the fair value of the two types of collateral could under or over report the amount of credit risk.

*     Trade Finance

Trade Finance provides working capital secured against debtors and other tangible assets. Wherever possible, additional security is obtained. These include personal guarantees from major shareholders, charges over personal and other business property, debentures, a floating charge, cross company guarantees from associated companies, and unlimited warranties in the case of fraud. These additional forms of security are impractical to fair value as valuations of the guarantees or warranties are not capable of being accurately determined at the balance sheet date.

      Loan loss provision 

The following tables provide an analysis of the movement of the Group's loan loss provision and charge during 2009 and 2008:
                                                                                
                                           Property     Trade    Asset
 Group                                       Finance  Finance  Finance     Total
 2009                                          £'000    £'000    £'000     £'000
 At 1 July 2008                                3,150    1,301    1,254     5,705
 Utilised                                    (5,011)  (2,313)  (5,286)  (12,610)
 Recoveries of amounts previously written      1,972    1,179    2,633     5,784
 off
 Charged to the income statement:
 Additional provisions created                41,659    3,929    9,440    55,028
 Recoveries of amounts previously written    (1,972)  (1,179)  (2,633)   (5,784)
 off
                                              39,687    2,750    6,807    49,244

 At 30 June 2009                              39,798    2,917    5,408    48,123

 Loan loss charge before gross-up             39,687    2,750    6,807    49,244
 adjustment
 Gross-up adjustment                          14,711    1,332    1,426    17,469
 Total bad and doubtful debt charge           54,398    4,082    8,233    66,713

                                                                                
                                            Property     Trade   Asset 
 Group                                        Finance  Finance  Finance    Total
 2008                                           £'000    £'000    £'000    £'000
 At 1 July 2007                                 1,553      836    2,538    4,927
 Utilised                                       (231)    (573)  (2,457)  (3,261)
 Recoveries of amounts previously written           9       99      155      263
 off
 Charged to the income statement:
 Additional provisions created                  1,828    1,038    1,173    4,039
 Recoveries of amounts previously written         (9)     (99)    (155)    (263)
 off
                                                1,819      939    1,018    3,776

 At 30 June 2008                                3,150    1,301    1,254    5,705

 Loan loss charge before gross-up               1,819      939    1,018    3,776
 adjustment
 Gross-up adjustment                            2,563      534      565    3,662
 Total bad and doubtful debt charge             4,382    1,473    1,583    7,438

Loans and advances to customers include hire purchase receivables as follows:

      Gross investment in finance leases receivable:

                                                       2009      2008
                                                      £'000     £'000
 No later than 1 year                                 5,857    19,286
 Later than 1 year and no later than 5 years         57,364    67,606
 Later than 5 years                                   1,806         -
                                                     65,027    86,892

 Unearned future finance income on finance leases  (11,820)  (15,517)
                                                                     
 Net investment in finance leases                    53,207    71,375

 Net investment in finance leases receivable :                       
 No later than 1 year                                 5,737    17,567
 Later than 1 year and no later than 5 years         46,207    53,808
 Later than 5 years                                   1,263         -
                                                     53,207   71,375 

Company

Company loans and receivables, as shown in Note 11, of £33,643,000 (2008: £26,310,000), comprise amounts due from subsidiary companies, all of which are repayable on demand.

Fair value

There is no material difference between the fair value and the carrying value of the Group's and Company's loans and advances to customers.

11. Other receivables, prepayments and accrued income

                                          Group      Group    Company    Company
                                           2009       2008       2009       2008
                                          £'000      £'000      £'000      £'000

 Amounts owed by Group undertakings           -          -     33,643     26,310
                                    
                   Other debtors            418        365          -          -
                 Corporation tax              -          -          -      1,955
                  Other taxation              -         18          -          -
      Prepayments and accrued income        409        768        393        104
                                            827      1,151     34,036     28,369

There is no material difference between the fair value and the carrying value of the Group's and Company's other receivables.

12. Deferred tax

Deferred tax is calculated in full on temporary timing differences under the liability method using a tax rate of 28% (2008: 28%).

Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets because it is probable that these assets will be recovered.

      The elements of the deferred taxation asset recognised in the financial statements are as follows:

                          GROUP     Unclaimed capital
                                           allowances                        Share based payments          Hedging amounts
                                                £'000                                       £'000                    £'000
                                                       Loan loss provisions                                                  Total
                                                                      £'000                                                  £'000
                                                                                                   Losses
                                                                                                    £'000
                 At 1 July 2008                 1,709                   644                    28       -            (787)   1,594

Credit to income statement                 5,964                 2,959                     -     405              843  10,171
                       (note 7)

Credited to hedging reserve                     -                     -                     -       -            2,686   2,686
               At 30 June 2009                  7,673                 3,603                    28     405            2,742  14,451

The unclaimed capital allowances of £7,673,000 are considered to be recoverable against future taxable profits primarily due to the fact that future taxable profits before capital allowances are forecast to be considerably higher than future accounting profits. This is due to the UK corporation tax rules for finance lessors requiring that the capital elements of lease repayments be taxed and that capital allowances be claimed by the lessor. 

The deferred tax asset of £405,000 arising from losses carried forward has been recognised as recoverable against future taxable profits that the directors consider more likely than not to occur on the basis of management forecasts.

The deferred tax assets relating to provisions and hedging are timing differences which arise from IAS 39 loan loss provisions and losses relating to cash flow hedging instruments.

                        COMPANY  Unclaimed capital allowances  Other timing differences  Total
                                                        £'000

                                                                                  £'000

                                                                                         £'000
                 At 1 July 2008                           (7)                         -    (7)

Credit to income statement                            69                         1     70
                       (note 7)

Credited to hedging reserve                             -                         -      -
               At 30 June 2009                             62                         1     63

The Group and Company's deferred tax asset balances are expected to be realised as stated below:

                                                        GROUP    2009   2008
                                                                £'000  £'000
          Deferred tax asset to be recovered within 12 months  4,731   -
 Deferred tax asset to be recovered after more than 12 months  9,720   1,594
                                                               14,451  1,594

                                                         COMPANY   2009   2008
                                                                  £'000  £'000

Deferred tax asset/(liability) to be recovered/(discharged)  -          -
                                                within 12 months

Deferred tax asset/(liability) to be recovered/(discharged)  63     (7)
                                       after more than 12 months
                                                                  63     (7)

There are no unrecognised amounts for deferred taxation in the Group or Company.

      13. Cash and cash equivalents

                           Group  Group  Company  Company
                            2009   2008     2009     2008
                           £'000  £'000    £'000    £'000
 Cash at bank and in hand  2,562  2,416      243       44

14. Borrowings

                                      Group              Company    
                                      2009      2008    2009    2008
                                     £'000     £'000   £'000   £'000
 Current
 Secured bank overdraft              1,879     9,195       -       -
 Secured bank loan                  81,000         -       -       -
 Unsecured intra-group borrowings        -         -   9,966   3,200
                                    82,879     9,195   9,966   3,200
 Non-current
 Secured bank loan                  98,707   210,030       -       -
                                                                    
 Total borrowings                  181,586   219,225   9,966   3,200

The secured bank loan included within non-current bank borrowings is stated net of £1,293,000 (2008: £970,000) of unamortised loan arrangement fees. 

The interest rate on the secured bank loan is 300bps over Libor.

15. Trade and other payables

                                        Group      Group    Company    Company
                                         2009       2008       2009       2008
                                        £'000      £'000      £'000      £'000
                          Current 
                    Trade payables      1,929      2,115        796        134
         Other taxation and social      1,062          -         28        226
                      security    
                         Accruals       4,328      3,885      1,438        132
                                        7,319      6,000      2,262        492

There is no material difference between the fair value and the carrying value of the Group's and Company's trade and other payables.

      16. Statement of changes in Shareholders' equity

                                        Called         Share             Own         Profit    Share based payment      Hedging        Total
                                      up share        premium         shares        and loss               reserve       Reserve        2009
                                       capital        account           held         account                                          equity
                                                                     reserve

                          Group
                           2009                                                                              £'000

                                                                       £'000
                                         £'000          £'000                          £'000                                           £'000
                                                                                                                           £'000
       At beginning of the year  261                   26,528        (1,507)          30,427                   477         2,022      58,208

Loss for the financial year              -              -              -        (40,607)                     -             -    (40,607)
        Increase in Share Based              -              -              -               -                   225             -         225
                Payment Reserve
        Transfer of share based              -              -              -             296                 (296)             -           -
   payments reserve for expired
                        options
 Fair value losses on cash flow              -              -              -               -                     -       (9,590)     (9,590)
                         hedges

Tax on fair value losses on              -              -              -               -                     -         2,686       2,686
               cash flow hedges
 Closing shareholders' equity              261         26,528        (1,507)         (9,884)                   406       (4,882)      10,922
                               

                                        Called         Share             Own         Profit    Share based payment      Hedging        Total
                                      up share        premium         shares        and loss               reserve       Reserve        2008
                                       capital        account           held         account                                          equity
                                                                     reserve

                                                                                                             £'000
                                         £'000
                                                                       £'000
                          Group                         £'000                          £'000                                           £'000
                           2008                                                                                            £'000
       At beginning of the year  260                   26,503        (1,507)          25,307                   277         1,080      51,920
              New shares issued              1             25              -               -                     -             -          26
  Profit for the financial year              -              -              -          8,844                      -             -       8,844
                     Dividends               -              -              -         (3,724)                     -             -     (3,724)
        Increase in Share Based              -              -              -               -                   200             -         200
                Payment Reserve
  Fair value gains on cash flow              -              -              -               -                     -         1,309       1,309
                         hedges

Tax on fair value gains on              -              -              -               -                     -         (367)       (367)
               cash flow hedges
 Closing shareholders' equity              261         26,528        (1,507)          30,427                   477         2,022     58,208 
                               

                                        Called         Share             Own         Profit    Share based payment       Total
                                      up share        premium         shares        and loss               reserve        2009
                                       capital        account           held         account                            equity
                                                                     reserve
                                                                                                             £'000
                                         £'000
                                                                       £'000
                        Company                         £'000                          £'000                             £'000
                           2009
      At beginning of the year   261            26,528                     -           5,278                   477      32,544

Loss for the financial year              -              -              -         (2,929)                     -     (2,929)
        Increase in Share Based              -              -              -               -                   225         225
               Payment Reserve 
        Transfer of share based              -              -              -             296                 (296)           -
   payments reserve for expired
                        options
 Closing shareholders' equity              261         26,528              -           2,645                   406      29,840
                               

      

                                        Called         Share             Own         Profit    Share based payment       Total
                                      up share        premium         shares        and loss               reserve        2008
                                       capital        account           held         account                            equity
                                                                     reserve
                                                                                                             £'000
                        Company          £'000
                           2008                                        £'000
                                                        £'000                          £'000                             £'000
      At beginning of the year   260            26,503               (1,507)           4,783                   277      30,316
              New shares issued              1             25              -               -                     -          26

Decrease in own shares held              -              -          1,507               -                     -       1,507
                        reserve
  Profit for the financial year              -              -              -           4,415                     -       4,415
                     Dividends               -              -              -         (3,920)                     -     (3,920)
        Increase in Share Based              -              -              -               -                   200         200
               Payment Reserve 
 Closing shareholders' equity              261         26,528              -           5,278                   477      32,544
                               

Own Shares Held Reserve

The Own Shares Held reserve represents the cost of funding the purchase, by the Trustees of the Company's Employee Benefit Trust, of ordinary shares in the Company, at an open market value.

Share Based Payment Reserve

The share based payment reserve represents the fair value of equity-settled share-based instruments, which are determined at the date of grant and expensed over the vesting period.

Hedging Reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have yet to occur.

      17. Reconciliation of loss before taxation to cash flows from operations

                                        Group      Group    Company    Company

                                         2009       2008       2009       2008
                                        £'000      £'000      £'000      £'000

         (Loss)/Profit on ordinary   (55,407)     12,735    (4,342)      4,415

activities before taxation    
   Add back : share based payments        225        200        225        200
  Add back: loss on de-designation      3,012          -          -          -
            of interest rate swaps
   Less fair value gain on foreign           
                exchange contracts       (41)

Operating (loss)/profit before   (52,211)     12,935    (4,117)      4,615
  share based payments and loss on
   de-designation of interest rate
                             swaps

   Depreciation of property, plant        164        197          2          -
                     and equipment
 Amortisation of intangible assets        318        277        152        113
  Amortisation of loan arrangement      1,000        550          -          -
                              fees
      (Increase)/Decrease in other        324        365    (7,622)    (7,171)
      receivables, prepayments and
                    accrued income
      Increase/(Decrease) in other      1,319       (51)      8,536        934
        creditors, trade and other
                          payables
  Decrease in amounts due to Group          -          -      1,110          -
       undertakings - Group Relief

Loss / (Profit) on disposal of         90        (4)          -          -
 property, plant and equipment    
   Loss on disposal of intangibles         91          -          -          -

Net cash (outflow)/inflow from   (48,905)     14,269    (1,939)    (1,509)
                trading activities

  (Decrease)/Increase in loans and     85,642   (10,194)          -          -
             advances to customers
            Increase in borrowings   (31,323)      (869)          -          -

Net cash inflow/(outflow) from      5,414      3,206    (1,939)    (1,509)
              operating activities

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

RNS Number : 1611Z Davenham Group PLC 16 September 2009

For immediate release 16 September 2009

Davenham Group plc ("Davenham" or the "Company")

Notice of Results

Davenham Group PLC, a leading independent asset based lender to the UK SME sector, will be announcing its preliminary results for the financial year ended 30 June 2009 on Tuesday, 29 September 2009. This is a change from the date previously announced in the Year End Trading Update released on 24 July 2009 (RNS number 2072W).

An analyst meeting will be held on the morning of the results at the offices of Smithfield.

For further information, please contact:

Smithfield 020 7360 4900

Reg Hoare / Rebecca Whitehead

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

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