Cleardebt Group PLC
22 June 2007
22 June 2007
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO OR
FROM THE UNITED STATES, CANADA, THE REPUBLIC OF IRELAND, AUSTRALIA, REPUBLIC OF
SOUTH AFRICA OR JAPAN
ClearDebt Group plc
('ClearDebt' or the 'Company')
Proposed acquisition of the entire issued share capital of
Abacus (Financial Consultants) Limited ('Abacus') (the 'Acquisition')
Placing of 15,750,000 new ordinary shares of 2p each in the Company ('Ordinary
Shares') at 2p per share (the 'Placing')
Approval of waiver of the obligation to make a mandatory offer under Rule 9 of
the City Code on Takeovers and Mergers (the 'City Code')
Admission of the Enlarged Share Capital to trading on AIM ('Admission')
Notice of Extraordinary General Meeting ('EGM')
Highlights
- Acquisition of Abacus, an established consumer debt resolution packaging
company, specialising in debt management plans ('DMPs') and the referral of IVAs
for a total consideration of up to £6.2m
- Acquisition could provide up to an additional 30 new IVAs per month to
ClearDebt
- Creation of an enlarged ClearDebt, now able to offer DMPs to consumers,
in addition to IVAs - allowing ClearDebt to compete effectively in wider
consumer debt resolution market
- Proposed equity fund raising of £315,000 (before expenses)
- CEO David Mond to lend ClearDebt Group £1.6m to fund the Acquisition,
the fees payable in respect of the Acquisition and to provide working capital
for the Enlarged Group
- Proposed appointment of Daniel Morris as Business Development Director
Acquisition of Abacus
ClearDebt has agreed terms with the current owners of Abacus (the 'Vendors'), an
established consumer debt resolution packaging company, for the acquisition of
the entire issued share capital of the company for a total consideration of up
to £6.2m. Abacus's primary income stream is the provision of DMPs, whilst it
also gains income from the referral of IVAs to third parties and commissions in
respect of secured and unsecured loan referrals. Abacus made a profit before tax
of £0.7m in the year ended 31 March 2007.
Acquisition Rationale
Abacus has a proven expertise in lead generation in the consumer debt resolution
market place. The Directors believe that the addition of this marketing
expertise and Abacus's DMP offering to the IVA solutions offered by ClearDebt
creates a broader, more diversified offering. In addition, Abacus currently
refers up to 30 IVAs per month to third party providers. It is the Directors'
intention that following completion the referrals will be made to ClearDebt.
The Directors believe that the combination of low cost IVAs, DMPs and internal
lead generation will provide the Enlarged Group with the ability to compete in
the debt resolution market and the Enlarged Group will be in a strong position
to grow going forward.
Terms of Acquisition
ClearDebt has conditionally agreed to acquire the entire issued share capital of
Abacus, subject, inter alia, to existing shareholder approval at the EGM. The
initial consideration for the Acquisition is £1.2 million to be paid in cash on
completion and to be adjusted pursuant to the net working capital of Abacus as
at completion. In addition, up to £5 million may be payable to the Vendors, to
be satisfied by the issue and allotment of up to 222,222,222 new Ordinary Shares
in the capital of the Company (the 'Earn Out Shares') which may be issued and
allotted to the Vendors in satisfaction of the earn out provisions set out in
the acquisition agreement. Payment of the earn out is conditional upon the
achievement by Abacus of agreed levels of future net profit before tax.
Proposed new Director
Daniel Morris is the managing director of Abacus and co-founded the company in
January 2000. He had a number of sales roles prior to Abacus, including spending
over four years at debt management company Gregory Pennington Limited, where he
was ultimately responsible for managing a team of sales advisers. Following the
Acquisition, Daniel will be ClearDebt's business development director with
responsibility for generating additional sales.
Fund Raising
The Company is proposing to raise £315,000 (before expenses) by the issue of
15,750,000 new Ordinary Shares pursuant to the placing at 2p per Ordinary Share,
primarily with UK institutional investors. The Placing Shares will represent
approximately 5.17 per cent. of the Enlarged Share Capital.
In order to assist with the payment of the initial consideration, the fees
payable by the Company in respect of the Acquisition and to provide the Company
with general working capital facilities, an unsecured loan agreement of £1.6
million between David Mond, CEO and a Director of the Company, (as lender) and
the Company (as borrower) has been arranged (the 'Loan'). The Loan will be drawn
down in full on Completion and will become due for repayment on 31 January 2009
and will accrue interest at the rate of 2 per cent. per annum above the base
rate of Clydesdale Bank plc.
The Loan is classified as a related party transaction under the AIM Rules. With
the exception of David Mond, who is involved in the Loan as a related party, the
Directors consider, having consulted with WH Ireland, the Company's nominated
adviser, that the terms of the transaction are fair and reasonable insofar as
its shareholders are concerned.
Completion of transaction
By reason of the size and relative value of Abacus in relation to ClearDebt, the
Acquisition will constitute a reverse takeover under the AIM Rules and will
therefore require the approval of existing shareholders of the Company at an
EGM. To complete the Acquisition and implement the Placing it will also be
necessary to give the Directors of the Company the required powers and
authorities to issue and allot the new Ordinary Shares to be issued pursuant to
the Acquisition and the Placing.
Due to the potential holdings of Ordinary Shares of the Vendors assuming the
Earn Out Shares are issued and allotted, the Company is also proposing to seek a
waiver of certain obligations that would otherwise be placed on the Vendors by
Rule 9 of the City Code. Accordingly, existing shareholders will be asked at
the EGM to consent to the waiver of these obligations.
An admission document setting out details of the transaction and notification of
the EGM (the 'Admission Document') will be sent today to all shareholders of the
Company and, for information purposes only, to holders of warrants in the
Company. The EGM will be held at George House, 48 George Street, Manchester M1
4HF at 11 a.m. on 16 July 2007. If all resolutions are passed at the EGM, it is
expected that the Existing Ordinary Shares will be re-admitted and the New
Ordinary Shares will be admitted to trading on AIM and dealings in the Enlarged
Share Capital will commence on 17 July 2007.
David Mond, CEO of ClearDebt commented:
'With the addition of talented new staff, the potential increase of our IVAs
per month and the introduction of a new debt management offering to our
automated debt advisory service, I believe this transaction will transform
ClearDebt from a niche player into a new force in the debt resolution market.
I am confident that our flexible kaizen derived systems will be able to cope
with the increased level of IVAs that we predict will result from the
Acquisition.
In the light of the potential for increased cash flows, I am very confident
about the Group's future prospects, as can be seen by my personal commitment to
the funding for the Acquisition. Given the current level of distress in the
consumer debt market, the Board will remain alert for any further deals which
will enhance the Group's value.'
For further information, please contact:
David Mond, ClearDebt Group plc Tel: 0161 228 7444
David Youngman, WH Ireland Limited Tel: 0161 832 2174
(Nominated adviser)
Ruari McGirr, St Helen's Capital Plc Tel: 020 7628 5582
(Broker)
Paddy Blewer, College Hill Associates Tel: 020 7457 2020
(Financial PR)
WH Ireland is acting as nominated adviser to ClearDebt in relation to the
Placing and Admission.
This press announcement has been issued by ClearDebt and is the sole
responsibility of ClearDebt.
St Helen's Capital plc is acting as broker to ClearDebt in relation to the
Placing.
St Helen's Capital Plc is acting exclusively for ClearDebt in relation to the
Placing and will not be responsible to anyone other than ClearDebt for providing
the protections afforded to customers of St Helen's Capital Plc, nor for
providing advice in relation to the Placing or any transaction or arrangement
referred to in this announcement.
The distribution of this announcement outside the UK may be restricted by law.
No action has been taken by the Company or WH Ireland that would permit a public
offer of shares in the Company or possession of this announcement where action
for those purposes is required. Persons outside of the UK who come into
possession of this announcement should inform themselves about and observe any
restrictions on the Placing and/or the distribution of this announcement in
their particular jurisdiction. Failure to comply with these restrictions may
constitute a violation of the securities laws of such jurisdictions.
This announcement does not constitute an offer to sell or an invitation to
subscribe for, or solicitation of an offer to subscribe for or buy, existing
Ordinary Shares or new Ordinary Shares to any person in any jurisdiction to whom
it is unlawful to make such an offer or solicitation. In particular, this
announcement must not be taken, transmitted, distributed or sent, directly or
indirectly, in or into the United States of America, Canada, Republic of
Ireland, Australia, Japan or South Africa or transmitted, distributed or sent to
or by any national, resident or citizen of such countries. Accordingly, neither
the Existing Ordinary Shares nor the New Ordinary Shares may, subject to certain
exceptions, be offered or sold directly or indirectly in or into the United
States of America, Canada, Republic of Ireland, Australia, Japan or South Africa
or in any other country, territory or possession where to do so may contravene
local securities laws or regulations. The Existing Ordinary Shares and the New
Ordinary Shares have not been and will not be registered under the United States
Securities Act of 1933 (as amended) or under the securities legislation of any
state of the United States of America, any province or territory of Canada,
Republic of Ireland, Australia, Japan or South Africa and they may not be
offered or sold directly or indirectly within the United States of America or
Canada, Republic of Ireland, Australia, Japan or South Africa or to or for the
account or benefit of any national, citizen or resident of the United States of
America, Canada, Republic of Ireland, Japan or South Africa or to any US person
(within the definition of Regulation S made under the US Securities Act 1933 (as
amended)).
Prices and values of, and income from, shares may go down as well as up and an
investor may not get back the amount invested. It should be noted that past
performance is no guide to future performance. Persons needing advice should
consult an independent financial adviser.
Information on ClearDebt
The business carried on by ClearDebt was founded in June 2004 by David Mond, a
senior partner of Hodgsons Chartered Accountants, a Manchester-based firm of
chartered accountants and insolvency practitioners. It commenced trading in
April 2005 as ClearDebt Limited, which was acquired by ClearDebt in January
2006. ClearDebt advises consumers who are finding it difficult to repay their
debts as they fall due. The principal solution offered to date has been the
individual voluntary arrangement (''IVA'').
Products and services
Consumers with debt problems have various options available to them including an
IVA, a secured or unsecured loan, the use of a debt management plan or
bankruptcy. An IVA is often the preferred solution for those individuals who are
able to use it as it allows the individual to continue with their day to day
lives with fewer restrictions than would be enforced in bankruptcy.
IVAs were introduced by the Government as part of the Insolvency Act 1986 (''
IA'') to assist debtors by offering an alternative to bankruptcy. Creditors
benefit from a higher return than if the debtor filed for bankruptcy. An IVA is
a legally-binding agreement between a debtor and its unsecured creditors which
provides for payment by the debtor of a fixed monthly amount for a period of
time, commonly five years, to a trust account supervised by an insolvency
practitioner. IVAs are, however, flexible and can be based on other means of
repayment, such as a one-off payment from a third party.
In setting up the agreement, the insolvency practitioner calculates what the
debtor can afford to pay and agrees this with the debtor. In a ClearDebt IVA,
prior to the creditors meeting, the debtor meets with an individual from the
network of insolvency practitioners with whom ClearDebt has a relationship or a
suitably qualified member of ClearDebt's staff to ensure that the debtor
understands his or her obligations; to verify that the information contained in
the proposal is still correct and that an IVA is still an appropriate solution
for the debtor and to fulfil the requirements of the Money Laundering
Regulations 2003. A meeting is then convened with creditors to vote on the
proposal at which 75 per cent. in value of those creditors voting must approve
the arrangement. If passed, the arrangement binds all other creditors and is
filed at Court. For the period of the IVA the insolvency practitioner is
responsible for supervising the arrangement to ensure that payments are made by
the debtor and for distributing the amounts due to creditors. Insolvency
practitioners typically charge a nominee's fee for securing an agreement and an
annual supervisor's fee for supervising payments during the life of the IVA.
Both the nominee's fee and the supervisor's fee are paid for ultimately by the
creditors and are deducted from the monthly payments received from the debtor.
Among the advantages of an IVA are the following:
- It allows a debtor to avoid bankruptcy which can prevent a debtor from
running a business or opening a bank account;
- It is interest-free as all debts are frozen and no further interest or
charges accrue when the IVA is agreed. Any debt remaining at the end of the IVA
period is written off;
- As the debtor is seen to be making an effort to pay off his/her debt,
creditors will often look upon debtors with IVAs more favourably in the future
when considering further credit arrangements; and
- The creditor benefits from a higher return than if the debtor filed for
bankruptcy.
ClearDebt's IVA process has been based on ''lean manufacturing'' principles
which minimise wasted time and maximise throughput. These principles are
incorporated in the ''debt analyser'' bespoke software and operating system
which has been developed by the Company. In the first stage of the process,
debtors complete a short questionnaire which provides basic information and
which generates a report indicating a range of possible debt solutions. Where an
IVA might be appropriate, the debtor then completes a more detailed second-stage
questionnaire which generates a personalised report.
ClearDebt's IVA process is internet-based and allows the debtor to populate the
secure database with their own relevant information. The system allows the same
process to deal with debtors who either have or who do not have assets such as
property, vehicles, savings and endowments, and those who are either in
full-time employment or self employed.
From this database the case administrator is able to produce automatically
generated documentation for the entire IVA process, including information packs,
letters and statutory forms which include the debtor's personal information.
This allows costs to be kept low.
The ClearDebt business model also requires a smaller number of staff, who are
known as personal insolvency advisers. They recommend an appropriate debt
solution to a debtor and monitor it thereafter. Elsewhere in the industry many
staff are focused on telesales, a function ClearDebt does not require but does
provide if needed. ClearDebt's ''debt analyser'' software has been designed to
be easily scaleable to enable large numbers of IVAs to be handled by the minimum
number of staff.
Clients benefit from the allocation of an individual personal insolvency adviser
who deals with their case from the beginning to approval at the creditors'
meeting. This provides consistent, knowledgeable and dedicated contact and
streamlines the delivery. The Directors believe this is reflected in the
conversion ratio of IVA leads received by ClearDebt which the Directors believe
is approaching 7 per cent and the case failure ratio per annum in the first two
years of a ClearDebt IVA which the Directors believe is, on average, 6.6 per
cent.
ClearDebt recently launched ''IVA Protect'', a payment protection insurance for
ClearDebt IVAs. The policy protects the debtor's monthly IVA contributions
should an individual be unable to work due to an accident, illness or
involuntary unemployment. It therefore benefits both the debtor, as it provides
security for the individual, as well as the creditors, as it results in lower
failure rates.
Where an IVA is not appropriate, ClearDebt will advise the debtor on alternative
solutions such as debt management, debt consolidation or bankruptcy and refer
the debtor to a third party who can provide the appropriate service. It is the
Directors' intention that following completion of the Acquisition referrals will
be made to Abacus. A concise but informative report is sent to all clients where
an IVA appears not to be appropriate, giving details of where additional help
may be sought. This involves minimal cost as the specifically designed system
allows such reports to be generated and populated with specific information with
little or no administrative input. ClearDebt aims to respond positively to all
its users to encourage them to return if their situation changes and, in the
future, ClearDebt intends to recommend the services of Abacus.
ClearDebt receives two types of fee in relation to IVAs, both of which are
ultimately paid for by the creditors and are deducted from the monthly payments
received from the debtor. A nominee's fee is charged for setting up the
arrangement, followed by an annual supervisor's fee. The Directors believe that
ClearDebt's fees are lower than some of its publicly quoted competitors.
Different levels of nominee's fees are applied, with a reduced rate available to
debtors owing less than £15,000. This represents a small percentage of clients
but opens up the benefits of an IVA to more individuals who might otherwise be
prevented from entering into an IVA by higher fees, which reduce the dividend
below a level acceptable to creditors.
The Board believes that ClearDebt's efficient business process and relatively
low fees allow the Company to operate in a sector of the market place where most
competitors do not actively seek business (that is debts under £10,000). The
Board believes that this sector of the market place will develop further in the
future following the announcement by the Government in May 2007 of its intention
to reform the legislation governing IVAs. The main proposal set out in the
Government's consultation paper relates to the implementation of a simplified
version of the IVA, (''SIVA''), which, subject to the outcome of the
consultation process, will be available from April 2008 for indebted individuals
whose affairs are straightforward.
ClearDebt's low fee structure allows it to pass on a higher proportion of debtor
payments to creditors. The Directors believe that this encourages creditors to
favour IVAs proposed to them by the Company. In addition, the British Bankers'
Association (''BBA'') and the Insolvency Service have announced that they intend
to commence a joint initiative with IVA providers and the creditor community.
The initiative will address, amongst other matters, the introduction of a
standard proposal with standard terms and conditions and reduced fee levels
linked to the success of IVAs. The Directors believe that ClearDebt's low fee
structure will enable the Company to benefit from such an initiative.
ClearDebt currently employs ten staff and David Mond and Lawrence Freedman, a
director of ClearDebt Limited, act as insolvency practitioners for the Group.
The Board believes that the experience of using a lean business process and an
internet platform now indicate that this number of staff could handle more than
100 cases per month.
Advertising and marketing
ClearDebt's marketing strategy concentrates on low-cost, internet prospect
acquisition techniques to attract the customers that its systems are designed to
handle. These techniques include keyword-based search engine advertising, search
engine optimisation and relationship marketing (through the development of tools
that encourage site re-visits and techniques like email marketing) which are
designed to minimise the cost per acquisition and will be closely managed to
ensure that they remain efficient and low cost.
ClearDebt complements this with the use of more traditional media channels to
increase brand awareness and to widen the pool from which cases can be sought.
The Board expects this to assist with the formation of referral relationships
with financial institutions which will provide a further method of acquiring
customers. Negotiations are ongoing but the Board is hopeful of finalising new
relationships once the joint BBA/ Insolvency Service initiative has been
implemented. The formation of such relationships may involve entering into
acquisitions, if appropriate.
On 20 March 2007, the Company entered into an introducer agreement with The
Money Helper, further details of which are set out in paragraph 11.12 of Part VI
of the Admission Document. The Money Helper has agreed to introduce to the
Company co-ordinating independent financial advisers who in turn should
subsequently introduce indebted individuals to the Company for the purpose of
arranging IVAs. A portal called ''The Debt Helper'' is being created to bring
referrals directly from The Money Helper to ClearDebt.
The Board also intends to make greater use of its existing network of insolvency
practitioners for marketing purposes.
It is the Board's view that marketing activity undertaken by its competitors,
future changes in the nature of IVAs and Government plans to encourage the take
up of the procedure, will help the market for IVAs to grow in the short to
medium term. ClearDebt's marketing communication is being developed as a result
of both competitor analysis and consumer qualitative research. The Board
believes that the distinctive nature of its product, the level of assistance
provided to debtors and a strong brand with a differentiated message will
promote ClearDebt's market share.
Markets and competition
(i) Level of consumer debt
As at the end of April 2007, private individuals in the UK owed more than £1,325
billion and consumer credit lending to individuals had risen to £213 billion.
Over the previous 12 months, personal debt rose by 10.4 per cent., and consumer
credit lending by 5.4 per cent. 330 people per day become insolvent.
As at March 2007, private individuals in the UK had £30 billion outstanding on
credit cards, £9.8 billion of overdrafts and £66 billion in personal loans. The
BBA reported that 75.1 per cent of credit card balances were bearing interest in
March 2007.
Average consumer borrowing via credit cards, motor and retail finance deals,
overdrafts and unsecured personal loans was an average of £4,537 per adult in
the UK at the end of April 2007. The average UK household owes £8,816, excluding
mortgages and £54,771 including their mortgage. Each household is paying on
average £3,542 in interest charges per year, which represents 9 per cent of
take-home pay.
The average graduate debt on leaving university was £13,252 in 2006, which is an
increase of 5 per cent compared to 2005.
(ii) Evidence of repayment difficulties
The Citizens' Advice Bureau (''CAB'') deals with 5,300 debt problems per day.
CAB dealt with 1.4 million debt issues in 2005-2006. Debt is now CAB's second
most common area of enquiry, only slightly behind state benefits.
More than 10 per cent of the population incurred charges for items such as late
repayment and exceeding credit limits on credit cards and personal loans in
2005. 3.4 million credit card holders regularly only make the minimum monthly
repayments and 18 per cent of credit card holders aged between 25 and 34 only
ever make minimum repayments. On average, people are paying 17.1 per cent APR
interest on their credit cards.
According to the Financial Services Authority, in 2006, two million households
in the UK were susceptible to an economic downturn and half a million were
having difficulty repaying debts. In 2006, seven out of ten households had no
emergency savings.
In 2006, the Consumer Credit Counselling Service (''CCCS'') saw call levels
increase by 53 per cent during the year to more than 917,000 enquiries. In 2006,
the typical CCCS caller was in their late 30s/early 40s married with children
and an average debt of £27,830.
Mortgage arrears continue to increase, with 21,931 possession orders being made
between January and March 2007 and 33,715 possession claims were registered in
the same period, which represents an increase of 10 per cent, compared to the
previous year. The Department for Constitutional Affairs revealed that the
proportion of possession orders suspended has decreased during the last year,
from 50 per cent to 46 per cent.
The Directors believe that the recent increase in interest rates will further
increase indebted consumers' monthly outgoings and, as a result there will be
more personal insolvencies.
(iii) Number of personal insolvencies
Department of Trade and Industry research from 2005 attributed increases in
personal insolvency to economic factors, particularly the availability and
levels of credit, although asset to debt ratio, interest rates and employment
levels are all factors.
The IVA continues to increase in popularity as a solution for consumer debt
problems. The Insolvency Service states in its recent consultation document that
since the IA came into force, the availability of credit has increased
significantly and the principal users of IVAs are not the original target group
of directors of companies, members of professions and traders. Nowadays, the
main users of IVAs are generally in full time employment and are over indebted,
i.e. their income, after deducting necessary living expenses, is insufficient to
service all of their debts. The table below shows that IVAs play an increasingly
important role in the resolution of the financial problems suffered by the
minority of borrowers who have experienced financial difficulties:
Year Number of IVAs
2001 6,298
2002 6,295
2003 7,583
2004 10,752
2005 20,293
2006 44,332
The latest available statistics from the Department of Trade and Industry, for
the first quarter of 2007, show an increase of 47.6 per cent in the number of
IVAs compared to the corresponding quarter in 2006. This contrasts with
bankruptcies, which grew by 10 per cent in the same period.
The number of IVAs in the first quarter of 2007 increased by only 4.7 per cent
compared to the last quarter of 2006, which would suggest a slow down in the
increase in the number of IVAs. The Directors believe that this slow down is
attributable to resistance from creditors to the level of fees charged by some
providers. However, the Board believes that this apparent slow down is temporary
and once current talks between IVA providers and creditors are concluded, IVAs
will continue to grow in 2007.
(iv) Competition
Only licensed insolvency practitioners are permitted to act as nominees or
supervisors of IVAs. As indicated above, the Government has expressed an
intention to implement a SIVA which will make the process more straightforward
and the Directors believe that this will require competitors to introduce fee
structures closer to ClearDebt's present model.
The supply of insolvency practitioners previously represented a barrier to entry
into the debt resolution industry. The Government has however, indicated in its
recent announcement that it will allow other authorised persons meeting certain
criteria and becoming members of a regulated body to act as nominees or
supervisors of IVAs.
The Directors expect that ClearDebt's low fee structure will challenge the
charges of competitor firms, many of whom use television advertising and
telesales as a primary method of acquiring their cases, and the methods they use
to acquire their work.
(e) Financial information
ClearDebt Group released its interim results for the 6 months ended 31 December
2006 on 5 March 2006.
During this period, the Group made an operating loss of £459,461 (2005 loss
£12,050) after amortisation of goodwill and capitalised development costs of
£173,279 (2005: £Nil).
On 29 December 2006, the Group raised £1,000,000 before expenses by means of a
placing of 31,746,031 new ordinary shares of 2p each to finance further
development of the ClearDebt model and to provide additional working capital.
As at 31 December 2006, the Group's balance sheet showed net current assets of
£1,547,145 including cash of £1,182,072 following the placing. The net asset
value as at 31 December 2006 was £4,681,943.
Information on Abacus
(a) Introduction
Abacus was founded in 2000 by Daniel Morris and his wife, Gina Morris. Abacus
assists consumers who are having problems repaying their debts and provides
unbiased advice on the options available to each individual. Its principal
source of income has been generated from debt management plans (''DMPs''). It
operates from offices in Timperley, Cheshire and has 25 employees.
(b) Products and services
Consumers with debt problems have various options available to them. After
carrying out an initial assessment of each individual, Abacus suggests the
solution that Abacus believes is most suitable to the consumer. If the suggested
solution is a DMP, Abacus will provide the plan on behalf of the applicant, but
if the suggested solution is a consolidation loan (secured or unsecured), an IVA
or bankruptcy, Abacus will refer the applicant to a third party organisation who
will arrange the loan, IVA or bankruptcy on behalf of the applicant.
Income generated from DMPs accounts for the largest part of Abacus's turnover. A
DMP is an informal arrangement between an individual and their creditors to
repay a reduced fixed monthly amount that is both affordable for the debtor and
acceptable to the creditor. A DMP is negotiated on behalf of the individual by a
debt solutions provider, like Abacus, and involves proving to the creditors that
the debtor cannot afford current repayment levels. The debtor's monthly payments
are consolidated into one affordable payment which is made to the debt solutions
provider who then makes the appropriate distributions to each creditor.
The arrangement provides for the repayment of all outstanding monies at the date
it is made and further interest charges may be frozen, although this is
dependent on the terms of the agreement with the creditors.
Like an IVA, a DMP allows a debtor to avoid bankruptcy, assuming agreed monthly
repayments continue to be made. Unlike an IVA, a DMP is an informal agreement
and does not involve the courts and it does not provide protection from all of
an individual's unsecured creditors as there is no legal obligation to assist
the creditor. A DMP does, however, give the individual an element of flexibility
to increase or potentially decrease monthly payments, subject to creditor
approval, if an individual's financial circumstances change.
From April 2002 until 19 April 2007, all DMPs recommended by Abacus were
referred to an unrelated company, Harrington Brooks. Under the referral
agreement, details of which are set out in paragraph 11.18 of Part VI of the
Admission Document, commissions on DMPs were split equally between Abacus and
Harrington Brooks. Harrington Brooks previously provided all the back office and
administrative functions required for managing a DMP, for example collecting
monthly payments from individuals and making distributions to creditors. This
has meant that Abacus has essentially been a sales and marketing organisation.
Since 19 April 2007, Abacus has carried out all aspects of its DMPs in-house,
including back office and administrative functions. A bespoke computer programme
developed by Cubic Evolution Limited is now being used by Abacus to assist
client management and the processing of DMPs.
Commissions earned from DMPs currently account for in excess of 70 per cent of
Abacus's income. In addition to commissions earned from DMPs, Abacus also
generates commission from referring individuals to IVA providers and specialist
secured and unsecured loan providers where these are believed by Abacus to be an
appropriate course of action for an individual.
Abacus has referred IVAs to a number of organisations in the past, for which it
typically receives a commission of around £1,000 for each approved IVA.
Following Completion, Abacus will refer all of its IVAs to ClearDebt. Abacus
refers up to 30 IVAs per month to third party organisations. The Directors
believe that Abacus has the potential to refer 100 IVAs per month.
Abacus also refers individuals with poor credit history to loan brokers in
circumstances when a loan may be appropriate. Abacus receives commission for
referrals to companies who provide loans.
(c) Sales and marketing
Leads are primarily generated through the internet via Abacus's websites. Abacus
also has a number of introducers, who provide data on individuals who have been
declined personal loans, in exchange for a commission. The introducers are
unsecured and secured credit brokers who have tried unsuccessfully to place the
prospective clients with lenders. These individuals are contacted directly by
Abacus. Abacus also receives referrals from its own clients.
(d) Markets and competition
Statistics in paragraph 2(d) of Part I of the Admission Document demonstrate
that levels of consumer debt are increasing, that more individuals are
experiencing repayment difficulties and that the numbers of personal
insolvencies are increasing.
The well known and larger established companies operating in the debt resolution
market include Baines and Ernst Limited, Churchwood Financial Limited, Gregory
Pennington Limited and Kensington Financial Management Consultants Limited.
There are also a large number of relatively small companies in the debt
resolution market which the Directors believe have been founded in response to
the growing market. The Directors and Proposed Director believe that these
companies do not have the financial resources or strategic website marketing
campaigns required to become significant operators in the market in the short to
medium term.
(e) Financial information
The table below summarises the audited trading results of Abacus for the period
from 1 June 2004 to 31 March 2005 and the years ended 31March 2006 and 31 March
2007. The information has been extracted from the historical financial
information set out in Part IV Section A of the Admission Document and should be
read in conjunction with the full text of the accountants' report set out in
Part IV Section B of that document.
10 months ended Year ended Year ended
31 March 31 March 31 March
2005 2006 2007
Turnover 1,210,050 1,707,668 1,354,768
Gross profit 626,171 660,138 266,552
Sale of DMP clients - 1,089,967 550,000
Profit on ordinary activities before tax 491,091 1,518,266 722,766
The sale of DMP clients to Harrington Brooks represents a sale of the rights to
ongoing monthly commissions. Further details of the agreements relating to the
sale of the DMP customer lists are set out in paragraphs 11.19 and 11.20 of Part
VI of the Admission Document.
As at 31 March 2007, the net asset value of Abacus was £641,248.
Current trading and prospects of the Enlarged Group
ClearDebt
ClearDebt's unaudited interim results for the six months ended 31 December 2006
were announced on 5 March 2007 and are set out in Section B of Part III of the
Admission Document. Since the end of that period, the IVA industry has
experienced a slow down in the rate of growth in the number of IVAs being
approved by creditors. This slow down has affected the number of new cases being
recorded by ClearDebt, although the Directors believe that the slow down is
temporary. However, whilst these conditions prevail, the Directors are
concentrating on controlling costs and conserving cash resources. ClearDebt
continues to trade in line with management's revised expectations which take
into account the slow down being experienced by the IVA industry.
Abacus
Abacus's audited financial results for the year ended 31 March 2007 are set out
in Part IV of the admission document. Since the end of that period, Abacus
relocated to new premises which resulted in an interruption to trading for
approximately two weeks. However, Abacus has continued to trade in line with
management's expectations.
The Enlarged Group
Following the Acquisition, the Directors believe that the Enlarged Group will be
able to provide a larger range of debt solutions to consumers and will benefit
from cross referrals between ClearDebt and Abacus.
Levels of personal debt continue to rise as does the number of individuals
experiencing repayment difficulties and the number of personal insolvencies. The
Board believes that the Enlarged Group will be in a position to benefit from the
growing market in IVAs and other debt solutions.
All employees of ClearDebt and Abacus will be retained, on their existing terms,
by the Enlarged Group following the Acquisition. Abacus will continue to operate
from its current offices and it is intended that, around September 2007, the
ClearDebt business, its employees and fixed assets will be relocated to the same
office building as Abacus, which is located in Timperley, Cheshire.
New Board composition
Current Directors
Gerald Carey (aged 64), Non-executive Chairman
Gerald is a former regional director of Barclays Bank plc and is also
non-executive chairman of Oxley Technology Group Limited and Barnes Logistics
Limited. He is also a Fellow of the Chartered Institute of Bankers. Gerald was
appointed chairman of the Company on 4 January 2006.
David Mond (aged 61), Chief Executive Officer
David qualified as a chartered accountant in 1971. Since that time he has been
in public practice as a chartered accountant specialising in insolvency and
turnaround situations. He is senior partner of Hodgsons Chartered Accountants.
For 10 years, David served on the Council of the Association of Business
Recovery Professionals (formerly SPI), retiring in April 2003. He was joint
administrator of the FADS household decorator business and was a director of
Strategic Retail plc (the company that acquired the FADS household decor
business) which was admitted to AIM in December 2003. He is a non-executive
director of another AIM quoted company, MKM Group plc. David is a licensed
insolvency practitioner.
Anthony Leon (aged 69), Non-executive Finance Director
Anthony is a chartered accountant and was managing partner of Binder Hamlyn's
Manchester office for 15 years. He is currently non-executive director of three
other AIM quoted companies. He is also a non-executive director of Central
Manchester and Manchester Children's' University Hospitals NHS Trust, having
been chairman of the Mancunian Community NHS Trust between 1995 and 2001.
Anthony is a deputy lieutenant in the county of Greater Manchester. Anthony was
appointed a director of the Company on 15 December 2006.
Andrew Smith (aged 55), Marketing Director
Andrew is a member of the Chartered Institute of Public Relations and also has
diplomas from the Chartered Institute of Marketing and the Communications,
Advertising and Marketing Foundation. He has worked in marketing communications
for 28 years, and has experience in the consumer finance and professional
services sectors. Between 1987 and 1989 he was marketing communications manager
for chartered accountants, BDO Binder Hamlyn, managing a large department with
significant national and local budgets. Between 1992 and 2004 Andrew was a
director of specialist insolvency communications firm Smith Grundon and Partners
Limited. He joined the Group in August 2004.
Proposed Director:
Daniel Morris (aged 31), proposed Business Development Director
Daniel is the managing director of Abacus and co-founded the company in January
2000. He had a number of sales roles prior to Abacus, including spending over
four years at debt management company Gregory Pennington Limited, where he was
ultimately responsible for managing a team of sales advisers. Following the
Acquisition, Daniel will be the Enlarged Group's business development director
with responsibility for generating additional sales
Conditional on Admission, Daniel Morris will enter into a service agreement with
Abacus for an initial period of three years which may be terminated thereafter
by either party serving at least 12 months' written notice. The basic annual
salary payable to Daniel Morris is £60,000 per annum to be reviewed annually.
Inducement fee
As part of the negotiations between ClearDebt and the Vendors, ClearDebt has
agreed to enter into an inducement fee arrangement. The inducement fee will be
paid to the Vendors to cover the reasonable costs and expenses of the Vendors,
up to a maximum amount equal to 1 per cent. of the value of ClearDebt (inclusive
of VAT, if any). The inducement fee is payable by ClearDebt in the event that
the offer to acquire the entire issued share capital of Abacus is withdrawn by
ClearDebt, and there has not at that time been any material change made by the
Vendors in the terms of the offer which they are willing to accept and/or enter
into and no material matter has arisen in due diligence.
The City Code and the Concert Party
The issue of the Earn Out Shares to the Vendors pursuant to the provisions of
the Acquisition Agreement will give rise to certain considerations under the
City Code. Brief details of the Panel, the City Code and the protections they
afford are described below.
The City Code is issued and administered by the Panel. The City Code applies to
all takeover and merger transactions, however effected, where the offeree
company is, inter alia, a listed or unlisted public company resident in the UK.
The Company is such a company and its shareholders are therefore entitled to the
protections afforded by the City Code.
Under Rule 9 of the City Code ('Rule 9'), a person who acquires, whether by a
series of transactions over a period of time or not, an interest in shares which
(taken together with shares in which persons acting in concert with him are
interested) carry 30 per cent. or more of the voting rights of a company which
is subject to the City Code, is normally required to make a general offer in
cash to all other shareholders of that company to acquire the balance of the
equity share capital of the company.
In addition, Rule 9 provides that where any person, together with persons acting
in concert with him, is interested in shares in a company which is subject to
the City Code and which in aggregate carry not less than 30 per cent but not
more than 50 per cent of that company's voting rights, and such person, or any
person acting in concert with him, acquires an interest in any other shares
which increases the percentage of the shares carrying voting rights in that
company in which he is interested, such person is normally required, in the same
way, to make a general offer to all shareholders.
An offer under Rule 9 must be in cash and at the highest price paid within the
preceding twelve months for any shares in the company by the person required to
make the offer or any person acting in concert with him.
Under the City Code, a concert party arises where persons acting together
pursuant to an agreement or understanding (whether formal or informal) actively
co-operate, through the acquisition by any of them of shares in a company, to
obtain or consolidate control of that company. Control means holding, or
aggregate holdings, of shares carrying 30 per cent or more of the voting rights
of the company, irrespective of whether the holding or holdings give de facto
control.
The Concert Party consists of the Vendors, who, for the purposes of the City
Code, are deemed to be acting in concert by virtue of the fact that they are
both shareholders of Abacus which is being acquired by the Company.
Under the Acquisition Agreement, an Earn Out of up to £5.0 million may be
payable to the Vendors, subject to the achievement by Abacus of agreed levels of
future net profit before tax. The payment of the Earn Out is to be satisfied by
the issue and allotment of up to 222,222,222 Earn Out Shares to the Concert
Party. If this maximum number of Earn Out Shares is issued, the earliest
opportunity being the date on which it is established whether the profit target
for the year ended 30 June 2010 has been met, the Concert Party will hold
Ordinary Shares in aggregate, representing approximately 42.18 per cent of the
then enlarged issued share capital (assuming no other issues of Ordinary Shares
before that time).
The table below shows the interest of the Concert Party assuming that the
Proposals are implemented and that no other issues of Ordinary Shares take place
between Admission and the issue of the Earn Out Shares:
Maximum percentage
of the issued share
capital of the
Maximum number of Ordinary Company following
Shares following the issue the issue of the Earn
of the Earn Out Shares Out Shares
Concert Party 222,222,222 42.18
The Panel has agreed, subject to Resolution 3 being passed on a poll by
independent shareholders of the Company at the Extraordinary General Meeting, to
waive the obligation on the Concert Party, under Rule 9, to make a general offer
for the entire issued share capital of the Company which would otherwise arise
on completion of the Proposals and the issue of the Earn Out Shares.
Accordingly, Shareholders' approval for the waiver of the obligations under Rule
9 is sought in Resolution 3.
Definitions
The following definitions apply throughout this document, unless the context
requires otherwise:
'Acquisition Agreement' the conditional agreement dated 21 June 2007 between (1) the Vendors and
(2) the Company relating to the Acquisition, which is conditional, inter
alia, on the passing of the resolutions at the EGM
'Completion' completion of the Acquisition on the terms set out in the Acquisition
Agreement
'Concert Party' The Vendors
'Enlarged Group' the Company and its subsidiaries and subsidiary undertakings following
Completion
'Enlarged Share Capital' the issued ordinary share capital of the Company immediately following
Admission including the New Ordinary Shares
'Existing Ordinary Shares' the 288,840,567 Ordinary Shares in issue as at the date of this document
'Group' the Company and its subsidiaries and subsidiary undertakings at the date
of this announcement
'Harrington Brooks' Harrington Brooks (Accountants) Limited, registered in England and Wales
under company number 3592213
'New Ordinary Shares' the 15,750,000 new Ordinary Shares to be issued (conditionally upon the
passing of the Resolutions) pursuant to the Placing
'Placing Shares' the 15,750,000 New Ordinary Shares to be issued pursuant to the Placing
'WH Ireland' WH Ireland Limited, registered in England and Wales under Company number
2002044
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