12 May 2010

 

CATTLES plc

 

Preliminary announcement of the audited final results

for the year ended 31 December 2008

 

Key results and balance sheet

 

·      Loss before tax £745.2 million (2007 restated: loss before tax £96.5 million)

·      Loss per share 156.38p (2007 restated: loss per share 23.56p)

·      Loan loss charge £794.3 million (2007 restated: £415.8 million) following detailed review of the application of impairment policies

·      Net loans and receivables £2.5 billion (2007 restated: £2.6 billion)

·      Borrowings £2.7 billion (2007 restated: £2.3 billion)

 

Cattles plc ("Cattles" or the "Company") today files its 2008 Annual Report and Financial Statements with Companies House. These were substantially delayed for the following reasons:

 

·      On 20 February 2009, a delay was announced in the release of the Group's 2008 Preliminary Results.  This announcement marked the beginning of a process, including an Impairment Review and a Forensic Review, which led to the discovery of a very significant shortfall in the Group's impairment provisions.

·      The events which unfolded after 20 February led to the conclusion that the Company was in breach of covenants under its borrowing arrangements.  Its financial creditors therefore had the right to demand immediate repayment of their loans.  A great deal of time and energy had to be devoted to stabilising the Group so that it could negotiate and obtain a standstill agreement with its key financial creditors.

·      On 25 November 2009, it was announced that Cattles had agreed a Standstill and Equalisation Agreement ("SEA") with its key financial creditors, and that this should improve the likelihood of Cattles achieving its restructuring objectives, namely:

·      to stabilise the financial position of the Company and its subsidiaries; and

·      against this background, to continue discussions with the Company's key financial creditors with a view to agreeing a consensual restructuring of the Group.

·      During the second half of 2009, the Board undertook a thorough analysis of the Group's businesses.  This analysis led the Board to recommend that there should be no further lending in Welcome Finance ("Welcome") and that instead the book should be collected out. This conclusion was announced to shareholders on 16 December 2009.

·      In the same period, given the accounting issues faced by the Group, the Board also considered the issue of whether it was appropriate for PricewaterhouseCoopers LLP ("PwC") to audit the Company's and subsidiaries' 2008 financial statements.  In November 2009, the Board concluded that it was not appropriate and therefore asked PwC to resign as auditor. Shortly afterwards, Grant Thornton UK LLP ("Grant Thornton") was appointed as the Group's statutory auditor.

 

In the light of these significant developments, which affected the Group in 2009, we were unable to prepare the 2008 financial statements until the resolution of these issues.  Grant Thornton started work on the audit of the 2008 financial statements in December 2009.

 

Furthermore, since the emergence of the accounting issues in February 2009, the business has been devoting considerable resource to establishing responsibility for the irregularities that came to light and the Board continues to co-operate as fully as possible with all interested regulators and to consider with the Company's legal advisers all possible avenues for potential claims against third parties.

 

On 25 November 2009, before our new auditor, Grant Thornton, had started work on the audit, the Group announced an unaudited loss before tax for 2008 of £555.3 million.  As well as being described as unaudited, these numbers were also stated to be subject to material change.  Discussions with Grant Thornton resulted in a number of adjustments including a further increase in impairment provisions as well as certain other provisions as at 31 December 2008 and in respect of prior years.  The revised audited loss before taxation for 2008 amounts to £745.2 million.  The adjustments which have been made to the previously reported numbers are summarised below:

 

	2008 £m	2007 £m
Unaudited (loss)/profit before taxation	(555.3)	22.7
Further additional loan impairments	(42.6)	(19.0)
Additional accruals and provisions for liabilities and charges	(101.6)	(4.1)
Impairment of goodwill and other intangibles	74.5	(91.1)
Cash flow hedges recycled and reported in net profit	(74.8)	(5.0)
Increase in financial liabilities following step up in interest	(45.4) _______	- _______
Audited loss before taxation	(745.2) _______	(96.5) _______

 

The preparation and audit of the 2009 financial statements is currently ongoing and the Company intends to announce the results for 2009 in the near future. 

 

Shareholders should be aware that again we will be reporting a significant loss for the year ended 31 December 2009 and a negative value for shareholders' funds.  As we stated on 16 December 2009, the shares are likely to have little or no value. Trading in Cattles' shares and bonds remains suspended until further notice.

 

 

ENQUIRIES

 

Margaret Young, Executive Chairman, Cattles plc                                         Tel:         020 7269 7252

Jamie Smith, Finance Director, Cattles plc

                                                               

Paul Marriott, Financial Dynamics                                                                   

 

 

 

EXECUTIVE CHAIRMAN'S STATEMENT   

 

Introduction and overview of events during 2009

 

I am obviously very disappointed to have to report our 2008 audited loss before tax of £745.2 million (2007 restated: loss before tax £96.5 million) which gives a loss per share of 156.38p (2007 restated: loss per share 23.56p). 

 

On 20 February 2009, we announced a delay in the release of the Group's 2008 Preliminary Results.  This announcement marked the beginning of a process, including an Impairment Review and a Forensic Review, which led us to the discovery of a very significant shortfall in the Group's impairment provisions.  As a result of the circumstances surrounding this very material shortfall in the level of impairment provisions, on 30 June 2009 we dismissed a number of Cattles plc ("Cattles") executive directors and other Welcome Financial Services Limited (WFS) senior executives.  At the same time, the Chairman and Chief Executive resigned. It was at this point that I became Executive Chairman of a restructured Board.

 

The events which unfolded after 20 February led us to the conclusion that we were in breach of covenants under our borrowing arrangements.  Our financial creditors therefore had the right to demand immediate repayment of their loans.  We decided not to continue lending to our Welcome customers (other than on a minimal renewal basis) during 2009.  Instead, we had to devote a great deal of our time and energy to stabilising the Group so that we could negotiate and obtain a standstill agreement with our key financial creditors. 

 

As part of the process of obtaining our creditors' agreement to the standstill, we were required to put out an announcement of our 2008 results on 25 November 2009.  These numbers, which were unaudited and described as being subject to material change, showed a very substantial loss for the year ended 31 December 2008.  This announcement represented the Board's best estimate of the likely result at that time and reflected the impact of the Impairment Review, which is described in more detail below. 

 

During the second half of 2009, we undertook a thorough analysis of the Group's businesses.  This analysis led us to recommend that there should be no further lending in Welcome and that instead the book should be collected out.  This conclusion was announced to shareholders on 16 December 2009.

 

In the same period, given the accounting issues faced by the Group, the Board also considered the issue of whether it was appropriate for PricewaterhouseCoopers LLP ("PwC") to audit the Company's and subsidiaries' 2008 financial statements.  In November 2009, the Board concluded that it was not appropriate and therefore asked PwC to resign as auditor.

 

Shortly afterwards, Grant Thornton UK LLP ("Grant Thornton") was appointed as the Group's statutory auditor.  Grant Thornton started work on the audit of the 2008 financial statements in December 2009.  Following completion of Grant Thornton's audit, we were finally able to announce audited results.

 

These results are different from the unaudited results previously published in November 2009.  The discussions we have had with our new auditor have resulted in a further increase in impairment provisions, and in the need to make certain other provisions as at 31 December 2008 and in respect of prior years.

 

The Impairment Review

 

In February 2009, as soon as it became clear that there was an issue with the Group's impairment provision, the Audit Committee commissioned Deloitte LLP ("Deloitte") to conduct an independent review of the Group's impairment policies and their application in the Company's accounts (the "Impairment Review").  Deloitte were instructed to assist the Audit Committee in order to establish the quantum of the impairment provision.  Deloitte's principal finding was that, as a result of a breakdown in internal controls, our impairment policies had been incorrectly applied.  This resulted in impairment provisions being materially understated and profit materially overstated.

 

The Forensic Review

 

In addition to the Impairment Review, the Audit Committee commissioned an independent forensic review (the "Forensic Review") which was carried out by Freshfields Bruckhaus Deringer LLP ("Freshfields") with the assistance of Deloitte.  The predominant reason for the Forensic Review was to enable the Audit Committee to assess and take legal advice on liability and related issues.  The Audit Committee also thought the Forensic Review was important for a number of other reasons:

 

·      to enable the Company to understand what happened and to take steps to ensure it could not happen again;

 

·      to enable the Company to identify any individuals who either posed a risk to the Company or who were otherwise culpable in what had happened, and to determine what action should be taken against individual employees; and

 

·      to be able to give an independent account of the matter to the Financial Services Authority (FSA) and any other interested regulatory bodies.

 

Results of the Forensic Review

 

The Forensic Review demonstrated that certain of the former executive directors of Cattles and certain of the former senior executives of WFS, over a period of time, had provided incomplete and misleading information and documents and/or failed to escalate matters of concern relating to impairment to the full Board and Audit Committee.  The provision of such incomplete and misleading information and documents to the full Board and Audit Committee, in conjunction with the withholding of certain other information and documents, combined to mask the true state of Welcome's loan book and, in particular, the correct level of arrears within that book.

 

Notwithstanding the Group's reported strong record of growth with stable credit quality and strong earnings performance, the non-executive directors had regularly challenged certain executives about key matters such as the level of cash being generated by the business, the quality of the rapidly expanding loan book and the adequacy of the loan loss provision.

 

In response to these challenges, certain executives had provided a range of presentations, documents and verbal reassurances to the non-executive directors that everything was entirely as it should have been and that there was no reason for concern.  In addition to this robust and consistent reassurance from such executives, the Audit Committee regularly sought and received reassurances on a number of matters, including specific assurance about the adequacy of the loan provision, from the external auditors to the Company's accounts at that time.

 

Action taken immediately following the conclusion of the Forensic Review

 

As a result of the Forensic Review, as we announced on 1 July 2009, the employment of each of the six senior executives who had been suspended pending the final outcome of the review was terminated with immediate effect and the Group Treasury & Risk director left the Company, also with immediate effect.   None of the departing executives received any compensation for loss of office. 

 

We also made the following changes to the operating structure of the Group and to the composition of both the Board and the board of WFS:

 

·      I was appointed Executive Chairman of Cattles with immediate effect, supported in this role by Robert East our Chief Restructuring Officer, who leads our discussions with our key financial creditors and James Drummond Smith, who had become our Finance Director in April 2009;

 

·      the board of WFS was also restructured, with the appointment of Laura Barlow as Executive Chairman in an interim capacity and Paul Mackin as Managing Director.  The Risk and Compliance function was strengthened with a number of external senior appointments.  Laura Barlow left the business at the end of January 2010 at which time I also became Executive Chairman of WFS and David Lovett joined that board on 25 February 2010; and

 

·      we focused on a programme of action to stabilise the Group's financial position including a controlled process of debt recovery and cash collection and the simplification of the Group's operating model to reduce costs.

 

Other Board changes which took place on 30 June 2009

 

There were two other changes in the composition of the Board on 30 June 2009 to enable the new Board structure described above to be put in place.  Norman Broadhurst stepped down as Chairman and as a director of Cattles (the Board having previously announced that Norman Broadhurst would not seek re-election at the forthcoming annual general meeting of the Company, either as Chairman or as a director of Cattles).  David Postings stepped down as Chief Executive and as a director of Cattles and left the Group with immediate effect.

 

Management of the Group and its operations since 1 July 2009

 

Following the changes to the Board described above, we have taken a number of steps to ensure that the Executive Board members have an appropriate level of information and control over the activities and operations of the business and to ensure that the whole Board has sufficient visibility of these matters. The Board's Executive Directors, together with the Group Risk and Compliance Director and the Managing Director of WFS (together referred to as the "Executive Team"), have a formal weekly meeting to review management and operational information, and to discuss and approve all significant operating and other decisions. This meeting also receives and reviews a report on risk and compliance issues that may have arisen in the previous week. The same group meets monthly to consider risk and compliance issues and internal control issues and to review progress in the resolution of these issues. The full Board receives copies of the minutes of all of these meetings.

 

The Audit Committee and the Group Risk Committee have met frequently since 1 July 2009. A particular area of focus for both of these committees has been the results of a thorough review of key controls which was carried out by Deloitte in the second half of 2009 on the instruction of the Executive Team. The committees have carefully monitored the Executive Team's progress in dealing with the issues raised by this review and this has created a good framework for the timely resolution of many of these issues. The Board has met even more frequently than these committees and has also reviewed a full management information pack at these meetings. The non-executive directors continue to provide a very valuable insight and challenge on the many difficult issues we have had to address during this period.

 

Business unit performance

 

WFS

 

WFS is Cattles' principal operating subsidiary.  During 2008, WFS comprised Welcome and Shopacheck, the Group's non-standard consumer lending businesses, and Welcome Car Finance, our car retail operation.  Pre-tax loss was £746.4 million (2007 restated: pre-tax loss £95.0 million).  Total net receivables were £2.3 billion (2007 restated: £2.3 billion). 

 

Welcome

 

As noted above, the key feature of the 2008 results is the significant increase in loan loss provisions, which has been the main cause of the large loss reported.  The loan loss charge increased to £737.3 million (2007 restated: £368.0 million). Total net receivables were £2.2 billion (2007 restated: £2.2 billion). Our current estimate of the fair value of Welcome's loans and receivables is £1.4 billion at 31 December 2008, which is calculated by discounting expected future cash flows from the loans and receivables. Loans and receivables have continued to impair post year end as the business is in run-off. 

 

Shopacheck Financial Services (Shopacheck)

 

Shopacheck, our home collected credit business, reduced its net receivables to £79.8 million (2007: £101.3 million).  As part of the review of impairment provisions noted above and subsequent review work, we also increased the loan loss charge in Shopacheck by an additional £9.2 million to £54.5 million (2007: £45.3 million).

 

Welcome Car Finance

 

Income from Welcome Car Finance grew by 3.9% to £110.2 million (2007: £106.1 million) as it increased unit sales by 5.1% to 14,461 vehicles (2007: 13,763).   Welcome Car Finance was closed in April 2009 as a result of funding constraints.

 

The Lewis Group

 

The Lewis Group reported a pre-tax loss in 2008 of £5.2 million (2007: pre-tax profit £10.2 million).  This reflected a reduction in cash collections as well as a more cautious view on the outlook for the UK economy and the housing market in particular, which led to a devaluation of the debt portfolios owned by The Lewis Group of £14.1 million (2007: upwards revaluation of £4.5 million).   Debt purchases during the year totalled £75.5 million (2007: £74.3 million).  The Lewis Group will refocus its strategy on contingent debt collection and by the end of 2010 its commitments to acquire further debt will have been completed.

 

Cattles Invoice Finance

 

Income grew 11.3% to £23.7 million (2007: £21.3 million), and client numbers remained steady at 727 (2007: 725).  Pre-tax profit reduced by 8.0% to £2.3 million (2007: £2.5 million) largely as a result of further provisions on three specific accounts noted in 2007.  The loan loss charge was £2.5 million (2007: £2.5 million).  On 14 September 2009, the Group sold this business for a cash consideration of £70.4 million.

 

Dividends

 

During 2008 an interim dividend of 6.51p per share (2007: 6.20p per share) was paid.  As a result of the losses for the year, no final dividend will be declared (2007: 13.10p per share).

 

Restructuring

 

On 25 November 2009, we announced that Cattles had agreed a Standstill and Equalisation Agreement ("SEA") with its key financial creditors, and that this should improve the likelihood of us achieving our restructuring objectives, namely:

 

·      to stabilise the financial position of the Company and its subsidiaries; and

 

·      against this background, to continue discussions with the Company's key financial creditors with a view to agreeing a consensual restructuring of the Group.

 

On 16 December 2009 at the General Meeting called to consider Cattles' serious loss of capital and the actions taken by the Board, I confirmed that, since the SEA announcement, we had met with representatives of our financial creditors to update them on the Group's recent financial performance and to review with them a range of strategic options.  These meetings followed extensive strategic, operational and financial analysis of the Group's businesses.  Based on this analysis and against the background of the significant losses incurred to date by Welcome, the directors were unable to recommend a business plan to financial creditors which would allow Welcome to lend to existing or new customers.

 

The Board therefore recommended a plan which would focus on collecting out Welcome's customer loans.  It is envisaged that the collection of the Welcome loan book could take two to three years and, during this period, the Group's cost base will contract to reflect the reducing size of the book. 

 

The Group's smaller businesses, Shopacheck and The Lewis Group, will carry on trading as normal.  We continue to explore the scope to develop these businesses further.

 

We are engaged in ongoing discussions with representatives of our key financial creditors in order to progress proposals for a consensual restructuring.  Those discussions have been constructive and demonstrate continuing progress towards a consensual restructuring.  On this basis, we have concluded that there is a reasonable expectation that the Company will continue to be able to pay its operational debts as they fall due for the foreseeable future and that we have a reasonable prospect of achieving a consensual restructuring. We therefore continue to adopt the going concern basis in preparing the financial statements.

 

We intend to announce our results for 2009 in the near future.  Shareholders should be aware that again we will be reporting a significant loss for the year ended 31 December 2009 and a negative value for shareholders' funds.  As we stated on 16 December 2009, the shares are likely to have little or no value.  The cash collection performance of Welcome's loan book has been as forecast for the first quarter of 2010.  Shopacheck and The Lewis Group have made satisfactory starts to 2010. 

 

Listing

 

The filing of the 2008 Annual Report and Financial Statements with Companies House does not affect the current suspension of the listing of the Company's securities, which was imposed at the Company's request in April 2009.  Any lifting of the suspension would require the approval of the UK Listing Authority and could not, in any event, take place before the publication of the 2009 Annual Report and Financial Statements.

 

Shareholders

 

As I said in my introduction to this statement, I am very disappointed to have to report audited losses for 2008, particularly on the scale shown in this annual report and financial statements.

 

I know that some of our shareholders had a substantial proportion of their savings invested in Cattles' shares.  Many of you have lost money that you have told me you could ill afford to lose.  These facts make it all the more painful for me to present this annual report.

 

I share your anger about what has happened.  Like you, I feel very let down by certain former executives.  I also share your frustration about the time that it is taking to establish responsibility for the problems which we have experienced.  However, these matters are extremely complex and cannot be resolved quickly.  I can only assure you that the current Board continues to co-operate as fully as possible with all interested regulators and to consider with our legal advisers all possible avenues for potential claims against third parties in relation to the impairment problems which finally came to light in February 2009.

 

People

 

The events that unfolded during 2009 have been extremely difficult for the Group and its employees.  As part of our programme to simplify the Group's operations we have had to release a significant number of people during 2009 and again in the first quarter of 2010.  Furthermore, at the end of 2009 we had to inform the Welcome employees that we intend to pursue a strategy of collecting out the customer loans over the next two to three years, as a result of which they are unlikely to have a long-term future with the business.  I have been impressed with the professionalism and dedication of our employees in very difficult circumstances and, on behalf of the Board, I wish to thank them for their continuing contribution to the business. 

 

 

Margaret Young

Executive Chairman

11 May 2010

 

 

INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

	Notes	2008 £m	Restated 2007 £m
Interest income	3	576.9	603.9
Fee and related income		151.8	179.4
Revenue from sale of goods		110.2	110.5
Other operating income		8.1 _______	18.4 _______
Revenue		847.0	912.2
Interest expense	4	286.3	137.6
Purchase of goods		67.1	68.0
Loan loss charge		794.3	415.8
Staff costs		155.2	145.3
Other operating expenses	5	289.3	242.0
		_______	_______
Loss before taxation		(745.2)	(96.5)
Taxation	6	(8.4)	(1.2)
		_______	_______
Loss for the year attributable to equity holders of the Company		(753.6)	(97.7)
		_______	_______
Loss per share Basic and diluted	8	156.38p	23.56p
		_______	_______

 

 

BALANCE SHEET

AS AT 31 DECEMBER 2008

	Notes	2008 £m	Restated 2007 £m
Assets
Non-current assets
Goodwill		-	-
Other intangible assets		1.6	6.1
Property, plant and equipment		22.2	22.5
Loans and receivables	9	1,168.4	1,610.1
Deferred tax assets		1.6	11.3
Derivative financial instruments		17.1	2.7
		________	________
		1,210.9 ________	1,652.7 ________
Current assets
Inventories		7.0	12.6
Loans and receivables	9	1,336.3	946.8
Current tax assets		85.1	41.5
Trade and other receivables		13.7	44.1
Derivative financial instruments		-	0.6
Cash and cash equivalents	10	9.7 ________	49.8 ________
		1,451.8	1,095.4
		________	________
Total assets		2,662.7 ________	2,748.1 ________
Liabilities
Current liabilities
Borrowings	11	2,716.7	2,317.0
Derivative financial instruments		1.0	7.8
Trade and other payables		59.5	53.9
Deferred income		33.1	27.5
Provisions		16.6 ________	- ________
		2,826.9 ________	2,406.2 ________
Non-current liabilities
Borrowings	11	28.7	6.4
Derivative financial instruments		89.1	27.4
Trade and other payables		4.8	11.7
Deferred income		29.4	45.8
Provisions		80.2	2.2
Retirement benefit obligation		15.0 ________	14.1 ________
		247.2 ________	107.6 ________
Total liabilities		3,074.1 ________	2,513.8 ________
Net (liabilities) / assets		(411.4) ________	234.3 ________
Shareholders' equity
Share capital	12	52.6	36.3
Share premium account	12	449.4	269.5
Other reserves	12	(0.3)	(0.8)
Retained earnings	12	(913.1) ________	(70.7)  ________
Total equity	12	(411.4) ________	234.3 ________

 

STATEMENT OF RECOGNISED INCOME AND EXPENSE

FOR THE YEAR ENDED 31 DECEMBER 2008

 

	Notes	2008 £m	Restated 2007 £m
Loss for the year	12	(753.6)	(97.7)
Cash flow hedges:
Fair value losses, net of tax	12	-	(3.1)
Recycled and reported in net profit	12	-	(1.1)
Actuarial (losses) / gains on defined benefit pension scheme	12	(9.9)	5.6
Reversal of deferred tax previously recognised	12	(6.3)	(3.9)
		_______	_______
Expense recognised directly in equity		(16.2)	(2.5)
		_______	_______
Total recognised expense for the year attributable to equity holders of the Company		(769.8)	(100.2)
		_______	_______
Effect of prior period errors		-	(148.4)

 

 

 

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

 

	Notes	2008 £m	2007 £m
Cash flows from operating activities
Cash outflow from operations	13	(434.0)	(537.4)
Tax paid		(46.6) ________	(37.6) ________
Net cash outflow from operating activities		(480.6)	(575.0)
Cash flows from investing activities
Disposal of subsidiary undertakings (net of cash and overdrafts transferred and contingent consideration repaid)		-	(0.6)
Purchase of property, plant and equipment		(1.6)	(2.2)
Proceeds from sale of property, plant and equipment		0.9	1.1
Purchase of intangible assets		(15.1) ________	(20.7) ________
Net cash outflow from investing activities		(15.8)	(22.4)
Cash flows from financing activities
Proceeds from issue of share capital	12	208.9	133.2
Costs incurred in relation to the issue of equity shares	12	(12.7)	(4.3)
Purchase of own shares		(0.5)	-
Issue of new borrowings		381.4	679.0
Repayment of borrowings		(37.5)	(131.5)
Dividends paid to shareholders	7	(71.1) ________	(65.3) ________
Net cash inflow from financing activities		468.5	611.1
Net (decrease) / increase in cash and cash equivalents		(27.9)	13.7
Cash and cash equivalents at 1 January		35.8 ________	22.1 ________
Cash and cash equivalents at 31 December		7.9 ________	35.8 ________
For the purposes of the cash flow statement, cash and cash equivalents comprise:
Cash at bank and in hand		6.8	20.6
Short-term bank deposits		2.9 ________	29.2 ________
Cash and cash equivalents		9.7	49.8
Bank overdrafts included within borrowings		(1.8) ________	(14.0) ________
		7.9 ________	35.8 ________

 

 

NOTES ON THE FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2008

 

Group information

 

Cattles plc (the "Company") is a public limited company incorporated and domiciled in the UK.  Its shares are listed on the London Stock Exchange although its shares were suspended from listing on 23 April 2009 and remain suspended at the date of this preliminary announcement.  The consolidated financial statements of the Company for the year ended 31 December 2008 comprise the Company and its subsidiaries (together referred to as the "Group").

 

Basis of preparation

 

The Group prepares its annual consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") and its interpretations issued by the International Accounting Standards Board as adopted by the European Union.  The accounting policies adopted for use in the preparation of the consolidated financial statements for the year ended 31 December 2008 and the financial information included in this preliminary announcement are disclosed in the 2008 Annual Report and Financial Statements on pages 37 to 90.

 

The financial information set out in this preliminary announcement does not include all the disclosures required by IFRS or the Companies Act 1985 and accordingly it does not itself comply with IFRS or the Companies Act 1985, consequently this preliminary announcement does not constitute the Company's statutory accounts within the meaning of Section 240 of the Companies Act 1985. 

 

The financial information for the year ended 31 December 2008 has been extracted from the consolidated financial statements for the year ended 31 December 2008 on which the auditor has given an unqualified opinion.  The auditor's report on the consolidated financial statements for the year ended 31 December 2008 contained an emphasis of matter paragraph, which draws attention to the material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern, as referred to below.  The auditor's report did not contain statements under Sections 237(2) or 237(3) of the Companies Act 1985.

 

The 2007 comparative financial information included in this preliminary announcement has been derived from the Group's consolidated financial statements for the year ended 31 December 2007 as restated following the events outlined in the Executive Chairman's Statement.  Details of this restatement are given in note 1.

 

The Group's consolidated financial statements for the year ended 31 December 2007 have been delivered to the Registrar of Companies and received an unqualified audit report which did not contain statements under Sections 237(2) or 237(3) of the Companies Act 1985.

 

Going concern

 

On 25 November 2009, Cattles announced that it had agreed a Standstill and Equalisation Agreement ("SEA") with its key financial creditors, and that this should improve the likelihood of Cattles achieving its restructuring objectives, namely:

 

·      to stabilise the financial position of Cattles and its subsidiaries; and

·      against this background, to continue discussions with Cattles' key financial creditors with a view to agreeing a consensual restructuring of the Cattles group.

 

Cattles, WFS and the other members of the Cattles group do not currently anticipate that the key financial creditors will demand repayment from Cattles, WFS or the other members of the Cattles group because the key financial creditors have agreed in the SEA not to do so while that agreement continues. 

 

Cattles and WFS are engaged in discussions with their key financial creditors and others in order to progress proposals for a consensual restructuring of the Cattles group.  While these discussions are progressing, a material uncertainty exists as to their outcome.  The complexity and number of issues on which it is necessary to reach agreement, the interests which must be taken into account in doing so and the number of stakeholders with whom those agreements are necessary make the achieving of a consensual restructuring uncertain.  However, the directors presently believe that a reasonable prospect of restructuring so as to avoid insolvent liquidation exists.  The directors' belief is primarily based on the level of support that continues to be provided by the financial creditors of the Cattles' group and the progress being made with them and others in furtherance of the achievement of a consensual restructuring.  However, as these discussions are ongoing there is a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern.

 

In addition, the directors continue to believe the Company and the Group will not cease trading in the foreseeable future, as Welcome focuses on collecting out its customers' loans, with Shopacheck and The Lewis Group continuing to trade as normal.

 

WFS owes an inter-company liability to Cattles of £2.9 billion. However, Cattles is also party to the standstill contained within the SEA and Cattles has agreed not to demand repayment of the inter-company liability while the SEA continues.

 

After making enquiries regarding the circumstances outlined above, the directors have concluded that there is a reasonable expectation that Cattles and its subsidiaries can continue to pay their operational debts as they fall due for the foreseeable future (taking into account the expectations of Cattles and its subsidiaries in relation to the ongoing discussions with key financial creditors, as referred to above).  Accordingly, they continue to adopt the going concern basis in preparing the financial statements. The financial statements do not include the adjustments that would result if the Group and the Company were unable to continue as a going concern.

 

 

1      Reconciliation of restatement of prior period errors

 

Following the events outlined in the Executive Chairman's Statement, a number of items have been restated in the Group's 31 December 2007 financial statements, details of which are provided in the table below:

 

	Note	As published 2007 £m	Restatement amount 2007 £m	Restated 2007 £m
Income statement
Interest income	a.	700.0	(96.1)	603.9
Fee and related income	b.	125.9	53.5	179.4
Interest expense	c.	132.6	5.0	137.6
Loan loss charge	d.	296.9	118.9	415.8
Other operating expenses	e.	146.8	95.2	242.0
Profit / (loss) before taxation		165.2	(261.7)	(96.5)
Taxation	f.	50.5	(49.3)	1.2
Profit / (loss) for the year		114.7	(212.4)	(97.7)
Balance sheet
Goodwill	e.	39.5	(39.5)	-
Other intangible assets	e.	57.7	(51.6)	6.1
Loans and receivables
Non-current	g.	1,778.5	(168.4)	1,610.1
Current	g.	1,065.6	(118.8)	946.8
Borrowings	h.	2,319.3	4.1	2,323.4
Current tax assets	i.	-	41.5	41.5
Current tax liabilities	i.	(53.4)	53.4	-
Deferred income
Non-current	j.	-	45.8	45.8
Current	j.	-	27.5	27.5
Other reserves	k.	(5.8)	5.0	(0.8)
Retained earnings	l.	295.1 _______	(365.8) _______	(70.7) _______

 

 

 

Summary of restatement items

 

a.          Interest income

There is a requirement under IAS 39 for interest recognised on an effective interest rate basis to be reduced where underlying loans become impaired. Interest income has been restated after the carrying value of the loans was reduced following additional loan loss charges.

 

b.          Fee and related income

Payment protection insurance commission income has been reclassified from interest income to fee and related income.

c.          Interest expense

As a result of the breach of the Group's borrowing covenants, the Company's hedging instruments were ineffective in 2007.  The amount of £5.0 million reflects the adjustments required to the income statement in accordance with the Company's accounting policies.

 

d.          Loan loss charge

As described in the Executive Chairman's Statement, the Group's impairment policies had been incorrectly applied.  This has resulted in the restatement of the loan loss charge for the year ended 31 December 2007 by £118.9 million and, for the years ended 31 December 2006 and prior, a total of £135.4 million of additional provision has been made to the 1 January 2007 retained earnings. The method of calculating the IBNR provision was first established as at 31 December 2008 following a review by the Board while assessing the change in economic circumstances. It has not been practicably possible without the use of hindsight, to calculate the amount required at 31 December 2007.  The cost of establishing the IBNR provision has therefore all been charged in the 2008 income statement.

 

e.          Other operating expenses

As a result of the loss before taxation incurred in 2007, it has been necessary to revise the cash flows used in calculating the previous estimates of value in use. This has led to a reduction in the carrying values of the goodwill (£39.5 million), other intangible assets (£51.6 million), and other costs (£4.1 million).

 

f.           Taxation

Tax charges have been restated and agreed with HM Revenue and Customs ("HMRC") to reflect the effect of the increased loan loss charge and other impairment charges.

 

g.          Loans and receivables

Loans and receivables balances have been restated to reflect the additional loan loss provisions (note d.) and deferred income (note j.).  This also results in the substantial restatement of the credit risk disclosures outlined in note 18 of the Group 2008 Annual Report and Financial Statements.

 

h.          Borrowings

As a result of the breach of loan covenants, it was necessary to reclassify the majority of borrowings as current and to write off certain issue costs, which had not previously been expensed through the effective interest method.

 

i.           Current tax assets / liabilities

The increased loan loss charge, an allowable expense for tax purposes, has resulted in the restatement and recognition of a current tax asset in the Group of £41.5 million, which has been subsequently recovered from HMRC.

 

j.           Deferred income

Loans and receivables have been grossed up by £73.3 million with the adjustment being shown as deferred income.

 

k.          Other reserves

The Group other reserves related to the cumulative fair value gain / (loss) of the Group hedging instruments.  As a result of the revised ineffectiveness test outlined in c. above, this adjustment relates to those fair value movements, which are subsequently chargeable to the income statement through interest expense in accordance with the Group's accounting policy.

 

l.           Retained earnings

Previously stated retained earnings have been restated to reflect the impact of the above items and the related tax effect.

 

m.            It has not been practicably possible, without the use of hindsight, to calculate the amount of impairment of investments in subsidiary undertakings and intra group loans required at 31 December 2007.

 

 

2          Segmental reporting

 

The segmental income and results for the year ended 31 December 2008 are as follows:

 

			Consumer credit £m	Debt recovery £m	Corporate services £m	Central £m	Eliminations £m	Group £m
Revenue			810.0	13.3	23.7	-	-	847.0
Inter-segment income			-	2.9	-	-	(2.9)	-
Interest expense			(270.8)	(10.1)	(5.4)	-	-	(286.3)
			_______	_______	________	________	________	________
			539.2	6.1	18.3	-	(2.9)	560.7
			_______	_______	________	________	________	________
Inter-segment sales are entered into under normal arm's length commercial terms and conditions.
Result
Segment result			(715.1)	(5.2)	2.3	(6.1)	-	(724.1)
			________	_______	________	________	________
Central expenses								(21.1)
								________
Loss before taxation								(745.2)
Taxation								(8.4)
								________
	Loss for the year attributable to equity holders of the Company							(753.6)
								________

 

The segmental income and results for the year ended 31 December 2007 are as follows:

 

			Restated Consumer credit £m	Debt recovery £m	Corporate services £m	Restated Central £m	Eliminations £m	Restated Group £m
Revenue			859.0	31.9	21.3	-	-	912.2
Inter-segment income			-	1.8	-	-	(1.8)	-
Interest expense			(129.8)	(6.3)	(4.4)	2.9	-	(137.6)
			_______	_______	________	________	________	________
			729.2	27.4	16.9	2.9	(1.8)	774.6
			_______	_______	________	________	________	________
Inter-segment sales are entered into under normal arm's length commercial terms and conditions.
Result
Segment result			(59.7)	10.2	2.5	(5.0)	-	(52.0)
			________	_______	________	________	________
Central expenses and goodwill impairment								(44.5)
								________
Loss before taxation								(96.5)
Taxation								(1.2)
								________
	Loss for the year attributable to equity holders of the Company							(97.7)
								________

3          Interest income

 

	2008 £m	Restated 2007 £m
Loans and receivables	576.3	602.4
Cash equivalents	0.6	1.5
	________	________
	576.9	603.9
	________	________

 

 

4          Interest expense

 

	2008 £m	Restated 2007 £m
Interest expense on bank borrowings	94.6	65.9
Interest expense on debt securities in issue and other borrowings	115.9	64.4
Fair value movements on derivative instruments:
Interest rate swaps	43.0	16.7
Cross-currency swaps	(1.9)	(0.1)
Other	34.7	(9.3)
	________	________
	286.3	137.6
	________	________

 

 

5          Other operating expenses

 

	2008 £m	Restated 2007 £m
Administrative expenses	56.3	42.0
Occupancy costs	21.6	18.4
Agents' commission	12.8	13.4
Advertising costs	13.2	12.1
Collection costs	18.5	8.6
Motor and travel expenses	6.7	5.3
Depreciation and amortisation costs	20.9	10.2
Impairment of goodwill and intangibles	10.3	91.1
Provisions costs	94.6	-
Other	34.4	40.9
	_______	_______
	289.3	242.0
	_______	_______

 

 

6     Taxation

 

Tax credit in the income statement	2008 £m	Restated 2007 £m
Current tax:
UK corporation tax at 28.5% (2007: 30%)	-	0.8
Adjustments in respect of previous years	5.0	(0.1)
	_______	_______
Total current tax charge / (credit)	5.0	0.7
Deferred tax:
Origination and reversal of temporary differences	(1.5)	(0.1)
Adjustments in respect of previous years	4.9	-
Change in tax rate	- _______	0.6 _______
Total deferred tax charge	3.4 _______	0.5 _______
Total tax charge in the income statement	8.4 _______	1.2 _______

 

Current tax on items credited to equity
Relating to share-based payments	(0.1)	(0.4)
	_______	_______
	(0.1)	(0.4)
	_______	_______
Deferred tax on items debited to equity
Relating to cash flow hedges	-	-
Relating to retirement benefit obligation	-	2.4
Prior year adjustment charged to equity	6.3	3.9
Change in tax rate	-	0.2
	_______	_______
	6.3	6.5
	_______	_______

 

The rate of tax for the year is 28.5% (2007: 30%) and represents a blended tax rate following the reduction in the rate of corporation tax from 30% to 28%, which was effective from 1 April 2008. 

 

The tax charge for the year is more than the tax on profit on ordinary activities at the standard rate for the reasons set out in the following reconciliation:

 

	2008 £m	Restated 2007 £m
Loss before taxation	(745.2) _______	(96.5) _______
Tax on loss at the standard rate of 28.5% (2007: 30%)	(212.1)	(29.0)
Factors affecting charge for the year:
Expenses not deductible for tax purposes	2.4	14.0
Adjustments to tax charge in respect of previous years	9.9	(0.8)
Change in tax rate	-	0.6
Movement in unprovided deferred tax	208.2 _______	16.4 _______
Total tax charge for the year	8.4 _______	1.2 _______

 

7      Dividends

	2008 £m	Restated 2007 £m
Amounts recognised as distributed to equity holders in the year:
Interim dividend for the year ended 31 December 2008 of 6.51p (2007: 6.20p)	23.6	22.4
Final dividend for the year ended 31 December 2007 of 13.10p (2006: 11.85p)	47.5	42.9
	_______	_______
	71.1 _______	65.3 _______

 

At the time of the payments of the 2007 final and 2008 interim dividends, the directors were of the opinion that the Company had sufficient distributable reserves from which to distribute the dividends. Subsequently, as a result of the events outlined in the Executive Chairman's Statement, it has transpired that the Company did not have sufficient distributable reserves to make these distributions.

 

The directors are not proposing a final dividend for the year ended 31 December 2008 (2007: 13.10p per share).

 

8     Loss per share

 

Basic loss 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.

 

The weighted average number of ordinary shares in issue and the own shares held in respect of the year ended 31 December 2007 has been restated to reflect the bonus element associated with the rights issue which took place on 4 June 2008.

 

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, being all options under the Group's Sharesave and Executive Share Option Schemes.  The number of potentially dilutive share options has been adjusted and restated to reflect the bonus element associated with the rights issue.

 

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below.

 

	2008			2007
	Earnings £m	Weighted average number of shares 'm	Loss per share pence	Earnings £m	Restated Weighted average number  of shares 'm	Restated Loss per share pence
Shares in issue during the year		482.2			415.5
Own shares held		(0.3) _______			(0.8) _______
Basic and diluted EPS	(753.6)	481.9	(156.38)	(97.7)	414.7	(23.56)
		_______			_______

 

9   Loans and receivables

 

Loans and receivables are analysed as follows:

 

	2008 £m	Restated 2007 £m
Welcome	2,184.4	2,223.3
Shopacheck	79.8	101.3
Cattles Invoice Finance	86.6 _______	99.4 _______
Originated loans and receivables	2,350.8	2,424.0
Purchased debt - The Lewis Group	153.9 _______	132.9 _______
Total loans and receivables	2,504.7	2,556.9
Debt purchase commitments	58.6 _______	93.3 _______
	2,563.3 _______	2,650.2 _______
Comprising: Current assets	1,336.3	946.8
Non-current assets	1,168.4	1,610.1
	_______	_______
	2,504.7 _______	2,556.9 _______

 

The estimated fair value of Group loans and receivables at 31 December 2008 is £1.6 billion.  Fair value has been calculated by discounting expected future cash flows from the loans and receivables at 10%, being the Group's cost of capital plus costs of collection effective at the balance sheet date.

 

Debt purchase commitments relate to certain contracts with third parties, in which subsidiary undertakings are committed to acquire debt.  These commitments are not included in the loans and receivables detailed in the balance sheet.

 

Credit quality

 

A summary of the arrears status of the Group's loans and receivables by class is shown below as at 31 December 2008 and 2007:

 

2008	Welcome  £m	Shopacheck £m	Cattles Invoice Finance £m	Total £m
Neither past due nor impaired	1,423.2	29.3	82.1	1,534.6
Past due	797.1	67.8	3.2	868.1
Impaired	1,356.0 _______	65.8 _______	2.9 _______	1,424.7 _______
Outstanding customer balance	3,576.3	162.9	88.2	3,827.4
Unamortised fees and costs and accrued interest	(167.8) _______	(28.6) _______	(0.3) _______	(196.7) _______
Gross loans and receivables	3,408.5	134.3	87.9	3,630.7
Loan loss provision	(1,224.1) _______	(54.5) _______	(1.3) _______	(1,279.9) _______
Originated loans and receivables	2,184.4 _______	79.8 _______	86.6 _______	2,350.8
Purchased debt - The Lewis Group				153.9 _______
Total loans and receivables				2,504.7 _______

 

 

2007	Restated Welcome  £m	Shopacheck £m	Cattles Invoice Finance £m	Restated Total £m
Neither past due nor impaired	1,572.4	32.4	95.5	1,700.3
Past due	601.2	71.5	2.4	675.1
Impaired	886.7 _______	75.6 _______	4.8 _______	967.1 _______
Outstanding customer balance	3,060.3	179.5	102.7	3,342.5
Unamortised fees and costs and accrued interest	(186.1) _______	(30.2) _______	(0.4) _______	(216.7) _______
Gross loans and receivables	2,874.2	149.3	102.3	3,125.8
Loan loss provision	(650.9) _______	(48.0) _______	(2.9) _______	(701.8) _______
Originated loans and receivables	2,223.3 _______	101.3 _______	99.4 _______	2,424.0
Purchased debt - The Lewis Group				132.9 _______
Total loans and receivables				2,556.9 _______

 

Past due balances relate to loans which are contractually overdue. However, Welcome's contractually overdue loans are not specifically impaired unless the customer is 120 days in contractual arrears.

 

Loans and receivables - past due

2008	Welcome £m	Cattles Invoice Finance £m	Total £m
Past due up to 29 days	282.4	1.0	283.4
Past due 30-59 days	230.5	0.2	230.7
Past due 60-89 days	158.7	0.1	158.8
Past due 90-119 days	125.5	0.8	126.3
Past due 120 days or more	- _______	1.1 _______	1.1 _______
	797.1 _______	3.2 _______	800.3
Shopacheck			67.8 _______
Total			868.1 _______

 

As at 31 December 2008, the Group had an IBNR provision of £150 million.

 

2007	Restated Welcome £m	Cattles Invoice Finance £m	Restated Total £m
Past due up to 29 days	143.1	0.8	143.9
Past due 30-59 days	221.3	0.2	221.5
Past due 60-89 days	139.0	0.1	139.1
Past due 90-119 days	97.8	0.2	98.0
Past due 120 days or more	- _______	1.1 _______	1.1 _______
	601.2 _______	2.4 _______	603.6
Shopacheck			71.5 _______
Total			675.1 _______

 

 

10       Cash and cash equivalents

 

	2008 £m	2007 £m
Cash at bank and in hand	6.8	20.6
Fixed interest bank deposits	2.9 ________	29.2 ________
	9.7 ________	49.8 ________

 

All bank deposits have a maturity of one month.

 

 

11       Borrowings

 

	2008 £m	Restated 2007 £m
Current
Bank borrowings and overdrafts	1,683.2	1,351.4
Other borrowings	1,029.4	963.6
Obligations under finance leases and hire purchase contracts	4.1 ________	2.0 ________
	2,716.7 ________	2,317.0 ________
Non-current
Bank borrowings	-	-
Other borrowings	21.9	2.4
Obligations under finance leases and hire purchase contracts	6.8 ________	4.0 ________
	28.7 ________	6.4 ________
Total borrowings	2,745.4 ________	2,323.4 ________

 

Following the breaches of covenants relating to a number of the above borrowings, all related borrowings at 31 December 2008 and 31 December 2007 became repayable on demand. As a result the 2007 balances have been restated.

 

 

12     Statement of changes in equity

 

	Share capital £m	Share premium account £m	Restated Hedging reserve £m	Own shares held reserve £m	Restated Retained earnings £m	Restated Total equity £m
At 1 January 2007 - restated	33.0	143.9	4.2	(3.1)	89.4	267.4
Actuarial gains on defined benefit pension scheme, net of tax	-	-	-	-	5.6	5.6
Fair value losses on cash flow hedges, net of tax	-	-	(3.1)	-	-	(3.1)
Transfers to profit or loss for the year	-	-	(1.1)	-	-	(1.1)
Reversal of deferred tax previously recognised	-	-	-	-	(3.9)	(3.9)
	________	________	________	________	________	________
Net (losses) / gains recognised directly in equity	-	-	(4.2)	-	1.7	(2.5)
Loss for the year	-	-	-	-	(97.7)	(97.7)
	________	________	________	________	________	________
Total recognised income and expense for year	-	-	(4.2)	-	(96.0)	(100.2)
Share-based payments:
Value of services provided	-	-	-	-	4.9	4.9
Settlement of share awards	-	-	-	-	(4.1)	(4.1)
Tax on share-based payments	-	-	-	-	0.4	0.4
Vesting of shares	-	-	-	2.3	-	2.3
Dividends	-	-	-	-	(65.3)	(65.3)
Issue of equity - placing	3.3	129.7	-	-	-	133.0
Costs incurred in share issue	-	(4.3)	-	-	-	(4.3)
Issue of equity - exercise of options	-	0.2	-	-	-	0.2
	________	________	________	________	________	________
At 1 January 2008	36.3	269.5	-	(0.8)	(70.7)	234.3
Actuarial losses on defined benefit pension scheme	-	-	-	-	(9.9)	(9.9)
Reversal of deferred tax previously recognised	-	-	-	-	(6.3)	(6.3)
	________	________	________	________	________	________
Net losses recognised directly in equity	-	-	-	-	(16.2)	(16.2)
Loss for the year	-	-	-	-	(753.6)	(753.6)
	________	________	________	________	________	________
Total recognised income and expense for year	-	-	-	-	(769.8)	(769.8)
Share-based payments:
Value of services provided	-	-	-	-	2.0	2.0
Settlement of share awards	-	-	-	-	(3.6)	(3.6)
Tax on share-based payments	-	-	-	-	0.1	0.1
Purchase of own shares	-	-	-	(0.5)	-	(0.5)
Vesting of shares	-	-	-	1.0	-	1.0
Dividends	-	-	-	-	(71.1)	(71.1)
Issue of equity - rights issue	16.3	192.6	-	-	-	208.9
Costs incurred in share issue	-	(12.7)	-	-	-	(12.7)
	________	________	________	________	________	________
At 31 December 2008	52.6 ________	449.4 ________	- ________	(0.3) ________	(913.1) ________	(411.4) ________

 

 

13     Reconciliation of loss before taxation to cash outflow from operations

 

	2008 £m	Restated 2007 £m
Loss before taxation	(745.2)	(96.5)
Adjustments for:
Depreciation of property, plant and equipment	11.8	6.6
Profit on disposal of property, plant and equipment	(0.5)	(0.1)
Loss on disposal of intangible assets	0.2	-
Amortisation of intangible assets	19.4	94.7
Share-based payments	(0.6)	3.1
Fair value movements on derivatives	41.1	0.4
Decrease/(increase) in loans and receivables	52.2	(568.8)
Decrease/(increase) in inventories	5.6	(5.4)
Decrease in trade and other receivables	30.4	3.8
(Decrease)/increase in trade and other payables	(10.3)	13.8
Increase in borrowings	78.1	19.0
Increase in provisions	94.6	0.4
Decrease in deferred income	(10.8)	(8.4)
	_______	_______
Cash outflow from operations	(434.0)	(537.4)
	_______	_______

 

The amount of interest paid and received (excluding that recognised in interest income) during the year was as follows:

 

	2008 £m	Restated 2007 £m
Interest paid	(168.7)	(123.4)
Interest received	4.3	4.4

 

 

14    Post balance sheet events

 

On 7 January 2009 the Company announced that in light of the continuing uncertain funding environment, new business volumes in Welcome in 2009 would be reduced by some 75% on 2008 and collective consultation had begun with employees over a reduction of around 1,000 jobs within the Group.  Annualised cost savings were estimated at £40 million and the costs of delivering these savings are expected to be £20 million.

 

The Board reported on 10 March 2009 that, based on information received to that date, and subject to completion of its external audit, it believed that the Group had incurred a significant loss before tax for the year ended 31 December 2008, and that it would be necessary to restate the Group's financial statements for the year ended 31 December 2007.  The Board also reported on 10 March 2009 that it believed Cattles was in breach of covenants under its borrowing arrangements.

 

On 1 April 2009, the Company announced that a report by Deloitte estimated that the Group would need to make a provision of around £700 million in excess of that originally anticipated with respect to the value of customer loans held as at 31 December 2008.  At that date, the amount of this provision that should be reflected in the profit and loss account for the year ended 31 December 2008 versus earlier years still remained to be determined.  However, the Board believed that such a provision would result in the Group reporting a significant loss before tax for the year ended 31 December 2008 and in the requirement to restate the Group's financial statements for the year ended 31 December 2007. 

 

On 1 April 2009, the Board also reported that it was considering whether to include an additional IBNR provision consistent with accounting standard IAS39.  Based on work carried out to that date, the Board believed that the adoption of such a policy would result in an IBNR impairment provision of approximately £150 million with respect to the value of customer loans held as at 31 December 2008.

 

On 23 April 2009, Cattles announced it was not in a position to publish its report and accounts for the year ended 31 December 2008 by 30 April 2009 as required by DTR 4.1.3.  In those circumstances, the Company believed that the FSA would ordinarily require the suspension of trading of the Company's shares and bonds with effect from 1 May 2009.  Therefore, in order to avoid a disorderly market and to protect investors, Cattles requested an immediate suspension of trading in its securities pending publication of its audited report and accounts for the year ended 31 December 2008, which was granted.

 

On 30 April 2009, the Group closed its car retail operation, Welcome Car Finance.

 

On 2 September 2009, Cattles announced the closure of 30 Welcome branches to better align the network with reduced levels of lending and deliver efficiencies in line with Cattles' commitment to manage the business through cost-efficient operations and improved cash collection processes.  510 employees received notice that they were at risk of redundancy and subsequently 266 left the business. 

 

On 14 September 2009 the Company's subsidiary undertaking, Cattles Invoice Finance Limited, was sold to ABS FS Limited for a total consideration of £70.4 million. The Company's share of this consideration was used to repay Cattles group bank indebtedness. 

 

On 29 October 2009, the High Court of Justice heard the application of Cattles to seek a determination in relation to whether the terms contained within certain cross-guarantee documentation operate to subordinate the Company's claims against its subsidiaries, including WFS, to the claims of certain bank creditors.  This application was brought as part of consensual discussions between all parties.  On 14 December 2009, the High Court delivered a decision that interpreted the cross-guarantee documentation to mean that the Company will be prevented from making claims against relevant trading company subsidiaries for money lent until the claims of the relevant bank creditors against those subsidiaries and the Company have been satisfied in full.  After judgment was handed down, permission was sought to appeal this decision to the Court of Appeal.  The High Court granted such permission to the Royal Bank of Scotland Plc and Party A (being a representative member of the Bondholders).  The Court of Appeal hearing is presently listed for 12 or 13 May 2010.     

 

On 25 November 2009, Cattles announced that it had agreed a formal SEA with its key financial creditors. At the same time, Cattles also agreed certain modifications to the terms of its bank facilities, private placement notes and, subsequently, its bonds.

 

The signing of the SEA and these modifications was expected to improve the likelihood of Cattles achieving its restructuring objectives, namely:

 

·   to stabilise the financial position of Cattles and its subsidiaries; and

·   against this background, to continue discussions with Cattles' key financial creditors with a view to agreeing a consensual restructuring of the Group.

 

The SEA was signed by Cattles, WFS, certain other members of the Cattles group and, among others, lenders of certain syndicated and bilateral facilities to Cattles ("Banks"), certain guaranteed hedging counterparties ("Guaranteed Hedging Counterparties"), certain unguaranteed hedging counterparties ("Unguaranteed Hedging Counterparties") and holders of certain private placement notes issued by Cattles ("Noteholders").

 

The SEA became effective on 17 December 2009 (the "Effective Date") following the formal approval of the amendments to the bonds by holders of the 2014 and 2017 bonds ("Bondholders").

 

The key provisions of the SEA include:

 

·   Standstill: A formal agreement by the key financial creditors to 'stand still' and therefore agree not to take enforcement action against Cattles, WFS or other members of the Group for a limited period of time.

·   Cash distributions: Obligations on WFS to distribute the majority of cash generated by the Group to the key financial creditors, subject to the right of WFS to forecast and retain a provision for working capital requirements and other contingencies. The SEA expressly provides that this forecast will be prepared on a conservative basis to provide ongoing liquidity for the Cattles group.

·   Cash management: Obligations on Cattles, WFS and other members of the Group to ensure that the majority of cash generated by the Group, which is currently subject to rights of set off in favour of certain key financial creditors, continues to be maintained in bank accounts that are subject to such rights of set off in favour of such key financial creditors.

 

The period of standstill is linked to the litigation process relating to certain intra Group subordination arrangements (as set out in Cattles' announcement of 11 August 2009) (the "Litigation").  The Banks, the Noteholders and the Guaranteed Hedging Counterparties are required to stand still during an initial standstill period from (and including) the Effective Date and ending on the earlier of:

 

(i)    30 June 2011;

(ii)   the date on which the relative entitlements of the creditors to Interim Distributions paid after the conclusion of the Litigation have been finally determined by the Entity Priority Accountant; and

(iii)  the occurrence of the date on which the SEA is terminated,

 

unless the Banks and the Guaranteed Hedging Counterparties whose claims against the Group represent at least 75% of the aggregate claims of the Banks and the Guaranteed Hedging Counterparties against the Group and the Noteholders whose claims against the Group represent at least 75% of the aggregate claims of the Noteholders against the Group decide that the standstill applicable to the Banks and the Guaranteed Hedging Counterparties and the Noteholders should be terminated.

 

During the period after 30 June 2011 or after the date on which the relative entitlements of the creditors to Interim Distributions paid after the conclusion of the Litigation have been finally determined by the Entity Priority Accountant, the standstill can be terminated (i) in the case of the standstill applicable to the Banks and Guaranteed Hedging Counterparties, by the Banks and Guaranteed Hedging Counterparties whose claims against the Group represent at least 75% of the aggregate claims of the Banks and Guaranteed Hedging Counterparties against the Group; and (ii) in the case of the Noteholders, by the Noteholders whose claims against the Group represent at least 75% of the aggregate claims of the Noteholders against the Group.

 

With respect to the Bondholders and the Unguaranteed Hedging Counterparties, the initial standstill period (which began on the Effective Date) has been extended following the appeal of the first instance judgment to the Court of Appeal.  The Court of Appeal hearing is presently listed for 12 or 13 May 2010.  There will be a further automatic extension of such standstill period following any appeal of the Court of Appeal judgement, provided that a relevant majority of the Banks, the Noteholders and the Guaranteed Hedging Counterparties agree that WFS shall fund the legal costs of any appeal (up to a maximum amount of £1,500,000). The standstill period for the Bondholders and the Unguaranteed Hedging Counterparties shall terminate where: (i) a relevant majority of the Banks, the Noteholders and the Guaranteed Hedging Counterparties do not agree that WFS shall fund such costs; or (ii) the SEA is terminated.

 

On 16 December 2009, Cattles announced that it was unable to recommend a business plan to financial creditors which would allow Welcome to lend to existing or new customers.  The Board therefore recommended a plan which would focus on collecting out Welcome's customer loans.  It is envisaged that the collection of the Welcome loan book could take two to three years and, during this period, the Group's cost base will contract to reflect the reducing size of the book. 

 

In 2009 all derivative assets and liabilities were converted into on-demand loans of £85.7 million with bank counterparties.

 

On 5 February 2010, Cattles announced the closure of circa 70 Local Management Branches and Local Collections Units nationwide.  Welcome entered into a consultation process from that date with staff affected by the proposals, of whom approximately 450 received notice that they were at risk of redundancy and subsequently 382 will leave the business.

 

On 7 May 2010, Cattles announced a proposal to close 18 branches nationwide and a contraction in the current operations management and their support staff in line with the smaller number of branches.  Welcome entered into a consultation process from that date, with staff affected by the proposals, of whom approximately 155 received notice that they were at risk of redundancy.