True stories found in the accounts

Burrowing beneath the surface of the financial results of two public companies in the financial services sector reveals some tasty morsels of information, says Richard Griffiths

On July 29, Berkeley Berry Birch reported 12-month results to March 31 2005. BBB has been mentioned in this column before, partly because of the notoriety caused by its closure of some subsidiary companies and the resulting Financial Services Authority investigations, and partly because of its acquisition of the Professional Mortgage Network.

In a statement Cliff Lockyer, executive chairman and group chief executive of BBB says: “The growth of the business has been hindered by the impact of the FSA investigation.”

According to Lockyer, the FSA is close to settling its investigation into the sale of life and regular savings products by Berkeley Independent Advisers, the IF network subsidiary of BBB. The original management of the BIAS is no longer with the company. BBB has provided for an exceptional charge of 1.4m to cover the FSA fine, legal fees and the cost of a “skilled person” to oversee a past business review into the sales of these products.

The FSA has discontinued its investigation into the liquidation of Berry Birch & Noble Financial Services and the sale of its business assets . Agreement has been reached with the liquidator over the claim that the business was sold to another group company below value.

The BBB directors considered that reaching a swift conclusion was in the best interest of the group. Therefore they agreed to make an ex-gratia payment of 600,000 to the liquidator without accepting any liability.

On the matter of capital adequacy, BBB’s regulatory return for the period ended June 30 2005 shows an unaudited capital deficit of approximately 12m. BBB is applying for a waiver of a rule concerning recognition of a debtor, which would reduce the deficit to around 6m as at June 30.

Separate to the investigations mentioned above, the statement goes on to say, “the FSA has commenced formal regulatory enforcement action, which could result in the FSA cancelling the permissions granted to the subsidiaries to act as independent financial advisers”. In other words, we may be closed down by the FSA.

On the network side, the number of advisers in BIAS fell 28% from 623 to 452 over the 12-month period to March 31, “reflecting the adverse publicity surrounding the group and the general move in the industry towards advisers being directly authorised”.

The group’s non-regulated network, Direct Protect, ceased to accept new business from January 14 when the insurance market became regulated. The company entered into a creditors’ voluntary liquidation in June.

The Financial Advisory division saw a 5% increase in the number of advisers, with 71 employed and 105 self-employed advisers working in the group.

Board changes during the financial year saw the roles of the divisional chief executives being made redundant.

Finally, tucked away in a footnote to the accounts, the auditors indicate that due to the uncertainties surrounding the group their audit report is likely to be modified to draw attention to the fundamental uncertainty in respect of the ability of the group to continue as a going concern.

Lockyer’s statement began by saying: “The last year has been a very challenging period…”. The current year may prove to be even more challenging.

Tale of the packager sold for the princely sum of 1

On July 18 , Alternative Investment Market-listed Prestbury Holdings reported six-month interim results to April 30 2005. Prestbury took over the Blue Pearl network earlier this year and trades under the Solutions Network name. It is another company which has featured in this column before. With Lee Birkett at the helm, it is the third largest mortgage network with 149 AR firms according to the FSA web register as at June 30.

Interestingly enough, its own report states that it has 120 AR firms. I am not sure what, if anything, happened between June 30 and July 18. From our experience at Network Data, we know the FSA register can be somewhat out of date but there is a surprisingly wide gap between 149 and 120.

The chairman’s statement starts off saying: “Following an extremely challenging 12 months, I am pleased to report improved results and a major corporate restructure.” So far, so good.

Under the details of the corporate restructure, Prestbury has agreed to sell its consumer and packaging business to Prestbury Investment Management for a nominal consideration of 1.

The consumer business consists of joint venture arrangements agreed some time ago with newspaper groups such as the Telegraph, Express and Times. The packaging business is, well, the mortgage packaging business we know and love.

Packaging is widely regarded as a profitable business which is why many of the new mortgage networks were set up by packagers. Their main driver was to protect their revenue streams from brokers who placed business with them on a regular basis

PIM, the new owner of the packaging business, is owned 25% by Stephen Keenan, executive director of Prestbury, and 75% by Lee Birkett, chief executive of Prestbury. PIM will take a sub-lease on office space in the same head office building as Prestbury.

So here we have a public company, Prestbury, arranging facilities for a private company owned by the two main executive directors of that public company. Weird.

The statement goes to some pains to point out that this transaction does not constitute, in view of its small size, a related party transaction for the purposes of rule 13 of the AIM rules. Prestbury’s nominated adviser, Grant Thornton, considers all matters connected with the transaction to be fair and reasonable as far as the shareholders of the company are concerned.

Following the chairman’s statement are financial accounts showing turnover up by 21% over the corresponding period in the previous financial year. There would have been a small contribution to sales resulting from the acquisition of the Blue Pearl business in March.

But gross profit is down by 17%, with the margin having slipped from 33% of sales to 23% of sales in the six-month period reported.

Unlike in BBB report there is no mention of capital adequacy, which is perhaps surprising as the balance sheet shows a deficit of shareholders’ funds – a negative to the tune of 444,653.