RNS Number:2274I
ISIS Asset Management PLC
04 March 2003
To: London Stock Exchange
Attention: RNS
From: ISIS Asset Management plc
Date: 4 March 2003
Annual Results - year to 31 December 2002 (audited)
Financial and business highlights.
* Integration of Royal & SunAlliance Investments (RSAI) ahead of target in
all respects.
* RSAI acquisition increases funds under management at 31 December 2002 to
#60.1 billion.
* Final dividend of 7.0 pence, giving an unchanged total of 11.0 pence for
the year.
* Net revenue rises to #87.6 million.
* Earnings per share before amortisation of goodwill and exceptional costs -
10.4 pence.
Extracts from the Chairman's Statement and Chief Executive's Report follow.
Chairman's Statement
With equity markets having recorded their sixth consecutive half year fall,
culminating in the FTSE 100 index having fallen by some 43 per cent since 1
January 2000, the current environment is providing a very different as well as
difficult operating environment for asset managers.
Against this background and with no signs of market returns heading back to the
double digit annual growth of the 1990's, many companies in the asset management
industry have been appraising their strategy and business plans and, as a
consequence, their operating structure and cost base.
This is not a period for the faint hearted or for inactivity as our acquisition
of Royal & SunAlliance Investment Management business ("RSAI") during the course
of the year and, indeed, our results demonstrate. We continue to trade
profitably and have made significant steps forward in terms of developing the
business for the benefit of our shareholders, clients and staff.
Results
Group profit before tax, goodwill amortisation and exceptional costs fell from
#27.0 million to #21.6 million. Earnings per share (before goodwill
amortisation and exceptional costs) fell from 13.6 pence to 10.4 pence. Any
comparison between revenue or, indeed, costs for the period requires careful
analysis as the transaction we completed on 1 July 2002 was both
transformational in terms of the business and also in respect of our revenues
and cost base.
Acquisition of RSAI
The acquisition of RSAI was a major transaction, increasing our funds under
management (at 1 July 2002) by some #34.8 billion. It also allowed us to change
our operating structure, significantly strengthen our personnel and move the
company into the top 10 UK active fund managers. The nature of the assets we now
manage, together with the fee bases we have negotiated on significant blocks of
these assets, have provided us with a degree of protection against the worst of
the ravages of equity markets. We are, however, not immune from the significant
downward movement in equity markets we have experienced during the year. Our
secure revenue base, together with our operational stability, financial strength
and results for the year, were all factors which were considered by the board
when addressing our final dividend payment.
Dividend
The board is recommending a final dividend of 7.0 pence per share to give an
unchanged total of 11.0 pence per share for the year. The decision to maintain
our dividend reflects the company's relatively strong position, our cautious
optimism for the future and a strong desire to deliver maximum shareholder
value.
ISIS Asset Management
During the second half of the year the board sought shareholders' approval to
change the name of the company from Friends Ivory & Sime to ISIS Asset
Management ("ISIS"). This decision, which was supported by shareholders, was not
taken lightly. We were not seeking to lose our heritage but position the
company, following the acquisition of RSAI, as a significant, independent asset
management company with a focus on delivering value and service in a very
different investment climate. To this end our name and logo have changed but
more importantly, we have commenced a major brand and values exercise with the
objective of creating a leading asset management company for the needs of the
21st century.
Board & Staff
As highlighted in my interim report to shareholders, following the acquisition
of RSAI on 1 July 2002, Nick Criticos, Ian Paterson Brown and Robert Talbut
joined the board as executive directors and Barry Sanjana stood down from the
board. On 18 December Keith Bedell-Pearce joined the board as an independent
non-executive director. His appointment not only strengthens the board by virtue
of his extensive financial services industry experience but also fulfils our
wish to have a majority of non-executive directors on the board.
As in all fund management companies, our most important asset is our employees
and the transaction provided the opportunity to not only appraise our
organisational structure but also to significantly enhance the quality of our
personnel by adopting a "best from both" approach across the two organisations.
In relation to our investment department, we now have our own dedicated research
team and a specialist risk team. We believe both are essential ingredients to
provide independent, value added, fund management services in today's
marketplace. On the people front, of particular note is the number of investment
professionals we now have in the organisation. It is, however, fair to say that
all areas of our business have been strengthened which will lead to enhanced
services to our clients.
Finally, on the personnel front I would like, in what has been a particularly
difficult environment, to pay tribute to all our employees. They have not only
had to face the challenges of the stock markets, but have put in a huge amount
of hard work and long hours to deliver a successful integration of the two
businesses. This is progressing very well and is commented on in detail in the
Chief Executive's Report.
Responsible Engagement Overlay ("reo(R)")
While this is a theme I have covered in previous reports, it is relevant to
cover two areas this year as both are important developments for our business.
reo(R) is now applied to some #16 billion of assets we manage and we are
continuing to build on its leading market position with new clients requesting
us to provide reo(R) as a stand alone service. Recent business wins include
Shropshire County Council and John Lewis and we are currently in discussion with
a number of other parties.
We have also this year decided for the first time to include with our annual
report a Corporate and Social Responsibility ("CSR") report (unaudited) which
sets out further details regarding reo(R) and the company's adherence to CSR
practices. We firmly believe that good corporate and social governance will
enhance shareholder returns over the longer term.
Corporate Behaviour
This has not been a year which will be remembered for good corporate governance
as evidenced by a number of high profile collapses and scandals round the world.
Not only have these events had an impact on global stock markets and investor
confidence, they have also accelerated changes to corporate reporting and
governance.
Your company has, for a number of years, been moving toward greater disclosure,
seeking to be both open and transparent in its corporate communication and
reporting. To this end the acquisition of RSAI and the operations of the
business throughout the year are addressed in considerable detail in the Chief
Executive's Report.
Outlook
With stock markets at current levels, the outlook for the investment management
industry is probably tougher than at any time in the last twenty years. That
said, in times like these it is most important to re-appraise business plans and
strategy and assess what opportunities exist to develop the business.
At ISIS we firmly believe that not only will there be further consolidation in
the industry, but also there will be opportunities for organic growth for those
asset managers who address what is a very different investment climate from that
which we have experienced over the last ten years or so.
Your company is not only well positioned to achieve organic growth, particularly
in the higher margin specialist areas of the market, but also to participate in
any industry consolidation which occurs, providing always that such activity is
in line with our strategy.
While the economic and stock market climate remains uncertain, we believe we are
strongly positioned to seek opportunities to build our business for the benefit
of our shareholders.
Sir David Kinloch
4 March 2003
Chief Executive's Report
Market Overview
To say that the market backdrop across the financial services sector is tough is
an understatement. Three consecutive years of falling equity markets, with
little sign at present of any sustained rebound, have significantly increased
the structural and financial pressures on the fund management industry.
It is only now that the effects of these pressures are becoming fully evident.
Across the asset management industry, operational margins have fallen sharply.
Indeed, a large number of asset management companies are loss-making in the
current environment. The implications for the industry are quite clear. Cost
structures and business models that were appropriate during the bull market
years of the 1990s are rapidly becoming redundant. Moreover, clients are
becoming more demanding than in the era of high nominal returns, with the
implication that active managers have to show that they can generate superior
investment returns if they are to justify higher fees.
The increasing financial pressure will act as a catalyst for consolidation in
the industry. There are over 1,000 asset managers in Europe, mostly 100 per cent
controlled subsidiaries of banks and insurance companies. No single player has a
market share greater than 5 per cent and only 15 players have market share
greater than 1 per cent*. The primary reason for this diversity was the
long-standing bull market, which produced above-normal returns, and attracted
many new entrants. An ever increasing number of these entrants are likely to be
looking to exit the market in the more difficult environment of today.
The implications of these structural and financial pressures can also be seen
across the industry's client base. On the retail side, there will undoubtedly be
significant change, both in the number of intermediaries and the way they do
business, as the abolition of the polarisation regime takes effect. The Sandler
Review will, I believe, assist in the drive for greater transparency and
simplification of products. However, the objective of generating significant
investments into an as yet undefined "low-risk" product and simplified
regulatory framework with a 1 per cent cap on charges, seems unrealistic.
Similarly, the institutional market is being transformed by the move away from
defined benefit pension schemes. Ultimately, it appears that we are rapidly
entering into an era where larger 'gatekeepers', be they retail or institutional
intermediaries, will want to do business with larger financial services
organisations, which have demonstrated resilience in the harshest investment
climates and can deliver a breadth and quality of product to meet their client
needs.
My own view for some time has been that the fund management industry will
polarise between small niche players and larger asset managers, the latter
managing a broad range of asset classes with an ability to extract economies of
scale. It is already noticeable that a growing number of clients are taking into
account the financial strength of their fund manager when making investment
choices. The 'middle-ground' is likely to rapidly erode. The intention at ISIS
is to position ourselves as one of the larger companies. In this context, the
acquisition of Royal & SunAlliance Investments ("RSAI"), the largest fund
management acquisition in the UK during 2002, was an important stepping stone.
The level of our funds under management has nearly doubled, to around #60
billion, which positions ISIS as one of the largest fund management companies in
the UK and within the top 50 in the world according to Global Investor (January
2003).
* according to 'The Future of Fund Management', a report by Oliver Wyman and
Company and UBS Warburg.
Integration
Much of the focus of our work in recent months has been integrating the Friends
Ivory & Sime and RSAI businesses. This has necessitated a fundamental
restructuring of the management of our business, our personnel and the systems
and processes used within the business. Given the mixed record of fund
management mergers, I am pleased to report that the integration has gone
extremely well. Throughout the process, we have met or exceeded the very
challenging timescales that were set prior to the completion of the acquisition
in July 2002. Moreover, we are also ahead of target both in terms of operational
integration and in terms of delivering the target financial synergies.
There are two key areas that are critical to the success of mergers in this
industry: people and systems. By far the largest cost in an asset management
business is staff costs which are directly linked to headcount. We moved quickly
to reduce the staffing level. We also sought to ensure that we improved the
overall quality of our people by adopting a "best from both" approach. All
senior people decisions were made within 30 days of the announcement of the
transaction, and all staffing decisions concluded within 60 days of completion.
The two investment teams were consolidated as one in our Wood Street offices by
September 2002.
Progress on our IT systems and administration has also been rapid. As a result
of the transaction we now have over 200,000 retail customers investing into our
collective funds, investment trusts and VCTs. We have made the decision to
consolidate the administration of our collective funds with the leading
outsource provider of transfer agency business in the UK, IFDS. This will not
only bring cost synergies but also improve overall service levels and ensure we
are able to take advantage of their continued investment in systems in the
future.
In addition, our investment dealing and front office systems have been
successfully harmonised and rolled out across the business, and our "back
office" investment support systems are due for consolidation on to a single
platform in the first quarter of 2003.
As indicated previously, the speed of the integration process has resulted in
significant cost savings. We estimate that savings will be in excess of #23
million, with the exact figure dependent primarily on the ability to let the two
London premises formerly occupied by RSAI. More details are available in the
Financial Review at the end of this report.
Finally, the successful integration has resulted in a scaleable business model,
capable of taking on additional funds under management at relatively little
additional cost.
Strategy
I have been asked on a number of occasions about the timing of our RSAI
acquisition. My response is categorical. The market place is changing, and
successful fund management companies of the future will need to operate in a
significantly different way than they have in the past, where reliance on bull
markets obscured the need to revisit and enhance business models. In that
respect, the timing of the RSAI deal was excellent. It has given us the
opportunity to revise our strategy, look closely at the way we do business and,
where necessary, fundamentally change our approach.
The acquisition of RSAI allowed us to take a large step towards meeting a number
of our previously stated strategic objectives. Over and above the increase in
funds under management, we now have a significantly more diversified revenue
stream both by asset class, and also by customer. Our two key insurance fund
clients, Friends Provident and Royal & SunAlliance, account for around 65 per
cent of our revenues on an annualised basis, and provide secure cash flows from
long-term contracts. As the Financial Review section highlights in more detail,
the benefits of having less than 40 per cent of our assets exposed directly to
equity markets has allowed us some protection from the worst of the downturn.
Indeed in the area of fixed interest and property, which represent over 50 per
cent of our asset base, our investment track record is very good and will
provide business opportunities in 2003 and beyond. Income received from our
largest customer, Friends Provident, was diluted to 35 per cent of revenues
during the year and will decrease further as a percentage in 2003.
Having achieved many of our integration and strategic ambitions during 2002, it
is now appropriate to set out the next stages of ISIS's development. Our goal is
to become a top 5 active investment manager in the UK over the next 5 years.
This will involve a considerable increase in assets under management, in current
money terms in excess of 50 per cent. In order to achieve this ambition, we have
already signalled that we are prepared to consider future acquisition
opportunities. In addition, a key element of our strategy is to move rapidly to
generate organic growth. To facilitate these ambitions, we have taken a number
of steps to change the structure of the business to be more closely aligned with
our strategic objectives.
Most obviously, we took an early decision after the RSAI acquisition to rename
the company ISIS Asset Management plc. Having launched the 'retail' ISIS brand,
after extensive research, over a year ago, the move to bring all areas of the
company under one name has enabled us to align the brand under a single succinct
and memorable name. This, in turn, has been an important step in reinforcing
external perception of us as an independent asset management business.
Two further changes which have had, and will continue to have, significant
benefits for the organisation are the withdrawal from overseas operations, and a
strengthening of our domestic business. All overseas operations in the US and
the Far East have been closed, and overseas clients, which account for less than
5 per cent of our revenue base, are now serviced from the UK. The move to close
sub-scale overseas operations and bulk up in the UK gives greater focus, allows
us to extract economies of scale and facilitates the development of our brand
perception.
A welcome result of the RSAI acquisition was to add significant depth to our
investment teams. In total, we now have in excess of 120 investment
professionals covering equities, bonds, property and private equity. Under the
new Chief Investment Officer, Robert Talbut, we have also taken steps to address
our investment process, again looking to combine the best from both companies.
Our integrated investment process is focused on specialists providing support to
fund managers in three key areas: fundamental corporate analysis, tailoring
portfolios to client specific risk profiles, and understanding the global
strategic and economic backdrop. We have also established a fund management
culture which encompasses clear individual accountabilities within a strong team
environment.
In part this reappraisal of our investment approach was prompted by the
disappointing performance that we have delivered to some institutional clients,
particularly within equity portfolios, over recent years. In contrast, our bond
team has continued to produce superior returns within a very difficult
environment. We are confident that in the long-term, the additional expertise
gained from the acquisition will lead to stronger investment performance, which
ultimately is a key factor driving organic growth.
In addition, we have separated the business into retail and institutional
functions, with each being represented separately at board level under Nick
Criticos and Peter Arthur respectively. This separation has been carried across
other areas of the company, including fund management, marketing and sales, and
allows a greater focus on the distinct and often differing requirements of our
various customers.
Within both retail and institutional propositions, our strategic positioning has
been led by the firm belief that investment markets have fundamentally changed.
Future investment returns are likely to be more modest, with equity stock
markets expected to generate no more than 6 per cent to 8 per cent on an annual
basis. In addition, market volatility will remain high. This is an opportunity
for active fund managers, but only if the volatility is understood and therefore
can be used for advantage. At the heart of our equity and credit investment
philosophy is the view that the increasingly harsh operating environment will
impact unequally between companies, even those in the same sector, and therefore
a greater emphasis on stock specifics is appropriate. Our own in-house research
and risk modelling teams will therefore play essential roles as part of this
evaluation process.
As a result of the restructuring, I believe that ISIS has a scaleable platform
for future growth. We have a significantly deeper pool of investment talent, we
have a stronger financial footing, which enables ISIS to manage more assets at
an efficient cost, and we have actively sought to develop key positions in both
the retail and institutional markets.
Value Creating Activities
One of the major challenges facing the financial services industry as a whole is
the requirement to regain the trust of investors. Three years of falling
markets, combined with a regular supply of negative press, has left people
confused and disenchanted. The industry has been slow to react and some
fundamental changes are urgently needed to convince savers that they should be
investing in products other than bank deposits for wealth creation. ISIS expects
to be at the forefront of these changes.
Launching a new brand at this time has allowed us to build these issues into our
proposition. We have invested heavily in the communication of our brand promise
"ISIS is a new investment company for a new investment reality. You can trust us
because we act responsibly, we focus on what we are good at and we don't over
promise." Much of the communication has been through promotional activity and
advertising using the strapline 'This is Reality'. Recent research undertaken by
the Daily Telegraph newspaper showed that we have already made significant
ground in name recognition, with 25 per cent of respondents recalling ISIS
advertising.
Although perhaps counter-intuitive, there has rarely been a more appropriate
time to launch a new brand into the retail or institutional markets. We believe
customers are looking for new alternatives, and a financial services company
that they can trust. Moreover, from a financial perspective, there has seldom
been a more rewarding time to invest in a brand. Advertising rates have fallen
sharply, and the absence of other leading players allows significantly higher '
share of voice'.
ISIS has a number of strengths that fit naturally into the new market
environment. Combining the existing product set with the new products acquired
from RSAI has given us competitive offerings, with strong track records, across
a range of areas. In the retail market we have particular strengths in the core
sectors of UK and European equities, corporate bonds, and fund of funds. During
2003, we will undergo a large fund rationalisation project to remove overlap in
the collective fund ranges. We anticipate a final range of approximately 30
retail funds. We also have strong offerings in the more specialist areas of
VCTs, where we are the leading player in the market under the Baronsmead brand,
as well as in Investment Trusts and Socially Responsible Investment (SRI).
In the institutional market, the key strengths reside in our fixed interest,
property and SRI propositions. In particular, an area of rapidly growing
interest is our Responsible Engagement Overlay (reo(R)) programme. In 2001, we
formed a venture with State Street Global Advisors (SsgA), with a reo(R)
overlay being applied to index-tracking funds, allowing institutional investors
to pursue social, environmental and ethical objectives without compromising
their financial obligations. In recent months, significant new investors,
including Shropshire County Council and John Lewis have adopted this service,
and we anticipate an expansion of our overall relationship with SsgA. In January
2003, Royal and SunAlliance Insurance Group plc also subscribed to our
responsible engagement service, taking our reo(R) funds to in excess of #16
billion.
Our market leading position in Socially Responsible Investment fits well with
our approach to Corporate and Social Responsibility ("CSR") and Governance
matters. This is covered in more detail within the Annual Report and Accounts
and within a separate CSR report to shareholders and other interested parties
which includes some examples of reo(R) in practice.
Financial Review
Funds under management were impacted by two major factors, our acquisition of
RSAI and the collapse in global equity markets. In addition there was an impact
from business gains and losses, which are set out in the table below:-
Business Inflows and Outflows 2002
Inflows Outflows Net
#m #m #m
Life and Pensions N/A N/A (1,864)
Institutional 124 (2,360) (2,236)
Retail 244 (204) 40
Private Equity 145 (17) 128
Total N/A N/A (3,932)
Life and Pensions movements represent our insurance client activities. Changes
in these categories can reflect balance sheet or corporate actions as well as
underlying business flows. For example we saw an outflow from Friends Provident
of some #200 million when they provided us with loan finance to acquire RSAI.
A significant institutional outflow of some #1 billion was due to the decision
of one of the two pension funds of Royal & SunAlliance, Royal Insurance Group
Pension Scheme, to move to a core/satellite approach, something that was
recognised at the time of the deal to buy RSAI. In addition the final tranche of
Eureko monies were withdrawn as this client group moved fund management
contracts to its recently acquired asset management subsidiary. There have also
been a number of much smaller third party institutional outflows as clients or
their advisors have sought to move funds due either to performance reasons or
perceived uncertainty surrounding the integration of the two businesses. The
challenge facing us in 2003 is to convince the adviser market that our
integration has been a success and has produced a robust and enhanced capability
for delivering superior investment returns, as we think it has. We believe our
proposition is particularly strong within the specialist areas of fixed interest
and SRI, the latter principally through our reo(R) products.
2002 was a difficult year for the entire retail investment sector. Our
performance track record is generally better here and we have focussed in recent
months on building our brand and infrastructure support, whilst rationalising
our product range. We expect to win market share in 2003 and beyond in what
remains a relatively high margin part of our business.
Finally, it is pleasing to note that we are now launching our first private
equity 10 year limited partnership. At the year end it had received commitments
of over #140 million out of a planned fund raising of #175 million. This success
builds on the excellent investment performance track record which our team have
developed in an asset class where fee structures are high and sustainable for
quality products.
ISIS revenues for the year, net of selling expenses, were #87.6 million versus
#83.5 million for 2001. Revenues during 2002 were significantly influenced by
the fall in stock markets and the acquisition on 1 July 2002 of the RSAI
business which produced net revenues of #22.8 million for the 6 months to 31
December 2002.
The table below shows the percentage of gross revenues earned from each of our
business areas by product type for the year to 31 December 2002. Also shown is
the percentage of revenues we would expect each area to contribute on an
annualised basis based on end year assets under management.
Sources of Gross Revenue
2002 Actual Annualised
Percentage Percentages
By Product
Investment Trusts 12 8
Venture Capital Trusts/Limited Partnerships 8 7
Unit Trusts/OEICs - Third Party 16 13
Institutional and Other 7 6
Other Life and Pensions 57 66
Total 100 100
By Client
FP 35 29
Non FP 65 71
As previously indicated, in excess of 50 per cent of our funds under management
are invested on behalf of clients in fixed interest, commercial property or held
as liquidity. These asset classes have not experienced the severe reduction in
value caused by declining equity markets and, as such, have provided a degree of
protection to our revenue base.
Furthermore, the majority of assets in these classes are managed for our two
major insurance clients, both of whom pay a composite fee rate which does not
differentiate between asset classes and hence removes any potential conflict of
interest in regard to advice on asset allocation. This is therefore beneficial
in periods of falling equity markets or when these clients are reducing equity
exposure in favour of fixed interest.
Following the acquisition of RSAI, income received during the year from Friends
Provident plc ("FP") fell to 35 per cent of revenues and will decrease further
as a percentage of revenues in 2003 with the effects of a full year's revenues
being received on the acquired business. This reduction in revenue dependency on
FP, encouraged by our parent, is evidence of ISIS developing into a more broadly
based asset management company.
Expenses for the year, excluding goodwill amortisation of #15.3 million, can be
split between recurring expenditure of #64.1 million and exceptional expenditure
of #19.2 million. Exceptional expenditure relates to the one-off restructuring
costs incurred in order to realise the synergies of the acquisition of RSAI.
These costs will span the years 2002 and 2003 and we have provided in 2002 those
expenses which have been incurred or contracted for. The speed at which we have
conducted the integration of the two businesses means that a significant
proportion of the exceptional costs are included in this year's results.
Staff costs are by far the largest cost in an asset management business. As seen
from the table below, we moved quickly to reduce the staffing level. At the year
end there were some 39 transitional staff on the payroll involved in integration
activity, the majority of whom will leave the organisation during the second
quarter of 2003. There also existed some 57 vacancies within the organisation at
the year end, some of which we are currently recruiting for but others may not
be filled after a post-integration review currently being undertaken.
We expect a further fall in our headcount in 2003.
Headcount 31.12.01* 30.04.02* 31.07.02 31.12.02**
Permanent 755 695 649 502
Vacancies N/A N/A N/A 57
755 695 649 559
Reduction - (60) (106) (196)
* Headcount numbers prior to 1 July 2002 represent actual numbers
for RSAI and ISIS combined.
** Excludes transitional staff involved in integration activities.
As part of the transaction we acquired the leases on two London properties,
being the premises which RSAI occupied prior to the transaction. In determining
our anticipated cost savings we had anticipated that we would vacate one of the
properties and retain the other. By 31 December we had vacated both properties
and, subject to timing of being able to let the properties in the current
economic climate, we will realise property related synergies of some #1 million
in excess of our original assumptions.
While we still have some major parts of the integration to deliver, as detailed
above, we firmly believe that we will deliver annualised cost savings in excess
of #20 million. This figure will exceed #23 million when we are able to let the
vacant London premises.
A significant part of the value of the RSAI transaction rested upon
identification, implementation and delivery of cost savings. In the circular to
shareholders issued in June 2002 we indicated that some 50 per cent of cost
savings would be achieved by 31 December 2002, 75 per cent during 2003 and 100
per cent by January 2004. We have delivered these savings ahead of our original
timetable.
As indicated at the time of the transaction, it costs money to create savings
and we anticipate that the final cost of achieving the synergies will be in line
with the basis of forecasting #1 of one-off restructuring cost for #1 of
annualised saving.
The board has declared an unchanged final dividend of 7.0 pence per ordinary
share for the year. This, when taken with the interim dividend of 4.0 pence per
ordinary share, results in an unchanged dividend for 2002 of 11.0 pence.
The total dividend of 11.0 pence is not fully covered by earnings per share of
10.4 pence before goodwill and exceptional expenditure in the year to 31
December 2002. Looking forward, the board is anticipating that, over time, the
dividend cover will be rebuilt. This will be dependent on a number of factors,
most particularly stock market performance, new business momentum and cost
control which will determine the timing of dividend cover restoration as well as
future dividend declarations.
We anticipate that by 2003 most of the synergies from the RSAI transaction will
be reflected in our cost base although the full impact will not be evident until
2004. In addition, we are now conducting a post-integration review which is
already leading to additional cost savings as we make our new business
operations more efficient and focussed. As a result, we expect that during the
second half of this year our cost base will move to a position whereby our
operating margin can be sustained at 30 per cent, or above, down to a FTSE100
equivalent level of 3500. This should put us in a relatively strong position
against our competitors in the industry.
Over recent years we have undertaken a number of corporate initiatives and as
part of these activities we have sought to be more proactive in managing our
Balance Sheet for the benefit of our shareholders. Since 1997 we have undertaken
a merger and three significant acquisitions as part of the process of building
the company into a broadly based asset manager. In each case we have sought to
finance such acquisitions in the most appropriate manner considering carefully
the options available and their impact on our shareholders and our financial
position. The acquisition of RSAI was financed using a combination of cash and
debt which was borrowed from our parent. To reduce costs this was done using two
facilities, a portion of fixed debt of #180 million and a variable facility of
up to #50 million. The rate for the debt was benchmarked with two external
providers, both of whom provided very competitive quotes for the business.
Following shareholders' approval last year we have received court approval to
convert #20 million of the share premium account into a special distributable
reserve and this has been actioned during the year and is being used to cushion
the impact of the costs of achieving the integration synergies.
We will continue to monitor and actively manage our balance sheet for the
benefit of the business and our shareholders recognising also that the
regulatory environment is changing and this will impact our industry as we go
forward.
Intangible fixed assets or goodwill now represents a significant figure on our
Balance Sheet and is the combination of a number of acquisitions. Current
accounting convention requires goodwill to be amortised over its useful life up
to a maximum of 20 years. This is likely to change when the United Kingdom moves
to adopt International Accounting Standards in 2005. Until then we will continue
to write off goodwill on acquired businesses over 20 years and on the RSA
management contracts over 10 years, being the term of those contracts.
Conclusion
The financial outlook for the industry appears grim after three years of falling
equity markets. But at such times we need to remind ourselves that this is a
long term growth industry. The combination of populations living longer and
becoming wealthier should be a positive factor for generating permanent savings
which will create business flows for the industry in the future.
We see opportunities in the current environment. Through the acquisition of RSAI
we have created cost and potential revenue synergies whilst improving the
quality of our business in the process. Generating organic growth on our
improved platform is a priority for us but we will consider further acquisitions
if suitable opportunities are identified which fit both our strategy and are
priced at a level which will result in enhanced returns to our shareholders.
While the environment is very difficult, and may get worse before it gets
better, we remain focussed on enhancing current and future shareholder value. We
look forward with a degree of confidence, but recognise that the environment has
changed for our industry and that the future winners will be those that adapt
their businesses accordingly, whilst retaining a clear focus on the needs of
current and potential clients.
Finally, I would like to thank all my colleagues for their efforts to ensure
that the integration has been handled both speedily and efficiently as well as
for their support through challenging times.
Howard Carter
4 March 2003
Consolidated profit and loss account for the year ended 31 December 2002
Continuing
Note Acquisitions Operations 2002 2001
#000 #000 #000 #000
Turnover
Group and share of joint venture 2 23,128 66,913 90,041 87,151
Share of joint venture 2 - (721) (721) (941)
Group turnover - continuing operations 2 23,128 66,192 89,320 86,210
Selling expenses (279) (1,465) (1,744) (2,695)
Net revenue 22,849 64,727 87,576 83,515
Administrative expenses (14,627) (49,474) (64,101) (61,236)
- excluding goodwill amortisation
- goodwill amortisation (8,129) (7,151) (15,280) (7,145)
Total administrative expenses (22,756) (56,625) (79,381) (68,381)
Other operating income - 1,241 1,241 1,665
Group operating profit - continuing 93 9,343 9,436 16,799
operations
Share of operating loss in joint venture (33) (212)
Total operating profit: group and share of 9,403 16,587
joint venture
Exceptional costs - continuing operations
Reorganisation costs post (19,169) -
acquisition of Royal & SunAlliance
Investments
Loss on termination of operations - (2,268)
Loss on disposal of subsidiary undertaking - (170)
Other finance income 351 510
Interest and investment income receivable 2,473 3,179
Interest payable (5,924) (260)
(Loss)/profit on ordinary activities before (12,866) 17,578
taxation
Tax on (loss)/profit on ordinary activities 3 (286) (7,015)
(Loss)/profit on ordinary activities after (13,152) 10,563
taxation
Dividend on Cumulative Preference Shares (26) (30)
(Loss)/profit attributable to ordinary (13,178) 10,533
shareholders
Interim dividend (5,996) (5,980)
Proposed final dividend 5 (10,494) (10,467)
Dividend adjustment - (3)
Retained loss for the year transferred from (29,668) (5,917)
reserves
Earnings per ordinary share before 4 10.36p 13.57p
amortisation of goodwill and exceptional
costs
(Loss)/earnings per Ordinary Share 4 (8.80)p 7.30p
Diluted (loss)/earnings per Ordinary Share (8.80)p 7.30p
Interim dividend per Ordinary Share 4.00p 4.00p
Proposed final dividend per Ordinary Share 7.00p 7.00p
11.00p 11.00p
Consolidated balance sheet at 31 December 2002
31 December 31 December
2002 2001
#000 #000
Fixed assets
Intangible fixed assets 335,932 131,787
Tangible fixed assets 7,932 6,588
Investments in joint venture:
Share of gross assets 168 419
Share of gross liabilities (80) (288)
88 131
Other investments 6 5,275
Insurance assets attributable to unit-linked 952,878 1,374,270
policyholders
1,296,836 1,518,051
Current assets
Stock of units and shares 740 380
Investments 6,714 6,563
Debtors 35,951 20,963
Cash at bank and in hand 30,242 67,784
73,647 95,690
Creditors (amounts falling due within one year)
UK Corporation tax (1,360) (4,107)
Proposed ordinary dividend (10,494) (10,467)
Other creditors (58,637) (32,649)
(70,491) (47,223)
Net current assets 3,156 48,467
Total assets less current liabilities 1,299,992 1,566,518
Creditors (amounts falling due outwith one year) (180,002) (252)
Provision for liabilities and charges (3,637) -
Insurance liabilities attributable to unit-linked (952,878) (1,374,270)
policyholders
Net assets excluding pension (deficit)/asset 163,475 191,996
Pension (deficit)/asset (5,972) 394
Net assets including pension (deficit)/asset 157,503 192,390
Capital and reserves
Called up Preference Share capital 390 390
Called up Ordinary Share capital 150 150
Share premium account 17,060 36,236
Other reserves 133,459 137,873
Profit and loss account 6,444 17,741
Shareholders' funds
Equity 157,113 192,000
Non-equity 390 390
Total Shareholders' Funds 157,503 192,390
Summary group cash flow statement for the year ended 31 December 2002 Cashflows
relating to
acquisitions
Notes 2002 2002 2001
#000 #000 #000
Net cash inflow from operating activities 6 5,213 7,569 14,126
Returns on investments and servicing of finance (3,766) (1,866) 2,809
Taxation - (5,392) (11,120)
Capital expenditure and financial investment (121) 2,535 486
Acquisitions and disposals (209,779) (209,749) 34,876
Equity dividends paid - (16,463) (14,193)
Cash (outflow)/inflow before use of liquid resources and (208,453) (223,366) 26,984
financing
Management of liquid resources - - -
Financing 185,000 185,824 228
(Decrease)/increase in cash in the year (23,453) (37,542) 27,212
Reconciliation of net cash flow to movement in net (debt)
/ funds
(Decrease)/increase in cash in the year (23,453) (37,542) 27,212
Cash inflow from increase in debt (185,000) (185,000) -
(208,453) (222,542) 27,212
Movements on acquisition of subsidiaries - - 6,098
Other non-cash changes - 151 17,215
Movement in net (debt)/ funds in the year (208,453) (222,391) 50,525
Net funds at 31 December 2001 - 74,097 23,572
Net (debt)/funds at 31 December 2002 (208,453) (148,294) 74,097
Consolidated statement of total recognised gains and losses ("STRGL")
for the year ended 31 December 2002
2002 2001
#000 #000
(Loss)/profit on ordinary activities after taxation (13,152) 10,563
Exchange loss arising on consolidation (435) (402)
Actuarial loss relating to the defined benefit pension (8,012) (4,904)
scheme
Deferred tax effect on actuarial loss for year 2,404 1,471
Actuarial loss recognised in STRGL (5,608) (3,433)
Total recognised gains and losses relating to the year (19,195) 6,728
Notes
1. Basis of preparation of the financial statements
The financial statements have been prepared on a consistent basis with
those accounting policies set out in the group's financial statements
for the year ended 31 December 2001.
2. Turnover and segmental analysis
2002 2001
#000 #000
Investment management fees 89,996 86,933
Net profit from OEIC and unit trust trading 45 218
90,041 87,151
2002 2001
#000 #000
Turnover was earned from clients in:
United Kingdom 87,022 80,429
Rest of Europe 2,060 4,678
North America 143 761
Far East 95 342
Group turnover 89,320 86,210
Joint venture:
Far East 721 941
Group and share of joint venture turnover 90,041 87,151
2002 2001
#000 #000
Turnover was earned by operations in:
United Kingdom 89,320 85,542
North America - 668
Group turnover 89,320 86,210
Joint venture:
Far East 721 941
Group and share of joint venture turnover 90,041 87,151
3. Taxation
2002 2001
#000 #000
UK Corporation Tax
UK Corporation Tax on taxable profits for the year 1,564 7,747
Adjustments in respect of previous periods 85 (419)
Total current tax charge for the year 1,649 7,328
Deferred tax
Originating on reversal of timing differences (1,363) (70)
Changes in estimation amounts of deferred tax - (243)
(1,363) (313)
Total tax charge for the year 286 7,015
Factors affecting the tax charge for the year
The tax assessed for the year is higher than the standard rate of corporation
tax in the UK. The differences are explained below.
2002 2001
#000 #000
(Loss)/profit on ordinary activities before tax (12,866) 17,578
(Loss)/profit on ordinary activities multiplied by standard rate of corporation tax
in the UK of 30.00%
(2001 - 30.00%) (3,860) 5,273
Goodwill amortisation 4,584 2,144
Disallowed expenses 1,634 693
Non-taxable income (736) (409)
Depreciation in excess of capital allowances (203) (15)
Short term timing differences 761 96
Adjustments in respect of previous periods 85 (419)
Tax losses utilised (382) (256)
Overseas tax not at 30% (234) 221
Current tax charge for the year 1,649 7,328
4. Earnings per share
Earnings per share at 31 December 2002 is based on:
i) the weighted average number of ordinary shares of 0.1
pence in issue during the year being 149,764,724 (year
ended 31 December 2001: 144,196,169); and
ii) losses attributable to ordinary shareholders.
Earnings per share before amortisation of goodwill and
exceptional items is based on:
i) the weighted average number of ordinary shares of 0.1
pence in issue during the period as stated above; and
ii) earnings available to ordinary shareholders before
amortisation of goodwill and exceptional costs (net of
tax).
5. Final dividend
The final dividend of 7.0p per ordinary share is based on the
issued share capital at 31 December 2002 of 149,908,837 ordinary shares
of 0.1p each.
6. Reconciliation of group operating profit to operating cash flows
2002 2001
#000 #000
Group operating profit 9,436 16,799
Amortisation of goodwill 15,280 7,145
Depreciation charge 2,131 2,011
Gain on disposal of tangible fixed assets (3) (1)
(Gain)/loss on sale of investments (735) 703
(Increase)/decrease in debtors (531) 3,970
Decrease in creditors (7,489) (15,000)
Decrease in stock of units and shares 70 130
Increase/(decrease) in provision for liabilities and 1,905 (313)
charges
Increase in investment provisions - 206
Cash outflow related to exceptional costs (12,495) (1,524)
Net cash inflow from operating activities 7,569 14,126
The cash outflow in respect of exceptional costs relates to:
2002 - the fundamental restructuring of the group following the
acquisition of Royal & SunAlliance Investments of #12,248,000 plus
#247,000 relating to the closure of the offices in New York and Japan.
2001 - the closure of the offices in New York and Japan.
7. Acquisition of Royal & SunAlliance Investments ("RSA
Investments")
On 1 July 2002 the company, through its wholly owned subsidiary
ISIS Treasury Limited (formerly Friends Ivory & Sime Treasury Limited)
acquired and gained control of RSA Investments, the UK asset management
business of Royal & SunAlliance Group plc. ISIS Treasury Limited
acquired 100% of the issued share capital of the following companies:
(i) 1,000,000 ordinary shares of 10p each in WAM Holdings
Limited
(ii) 500,000 ordinary shares of #1 each in Royal &
SunAlliance Investment Management Limited (renamed ISIS
Investment Management Limited)*
(iii) 13,200,000 ordinary shares of #1 each in Royal &
SunAlliance Unit Trust Management Limited (renamed ISIS
Fund Management Limited)*
(iv) 1,000,000 ordinary shares of 25p each in Royal &
SunAlliance Property Investments Limited (renamed ISIS
Property Investments Limited)*
(v) 2,600,000 ordinary shares of #1 each and 1,000,000
redeemable shares of #1 each in Royal & SunAlliance
Savings & Investments Limited**
(vi) 2 ordinary shares of #1 each in SunAlliance Investment
Management Limited***
* Subsidiary of WAM Holdings Limited
** Subsidiary of Royal & SunAlliance Unit Trust Management
Limited
*** Subsidiary of Royal & SunAlliance Investment Management
Limited
The business combination is being accounted for as an acquisition.
The six companies were acquired from Royal & SunAlliance Insurance
Group plc for an initial consideration of #239,879,000. Under the terms
of the Sale and Purchase Agreement ISIS Treasury Limited is entitled to
receive net assets of #28,232,000. Following agreement of the Completion
Accounts, a # for # adjustment will be made to the initial consideration
to reflect the agreed net asset position at completion (1 July 2002). An
estimated further consideration of #3,737,000 is outstanding on the
acquisition as the net assets per the Completion Accounts were greater
than #28,232,000.
An initial cash payment of #235,688,000 was paid to the Royal &
SunAlliance Insurance Group plc reflecting the initial consideration of
#239,879,000 less #4,191,000, being an estimate of the net inter-company
balance due to the WAM Holdings Limited group by the Royal & SunAlliance
Insurance Group plc. The final settlement will be paid following
agreement of the Completion Accounts.
Expenses of #5,500,000 were incurred in connection with the
acquisition.
The purchase of the three trading companies was all part of the
same transaction with Royal & SunAlliance Insurance Group plc. As a
result the fair value table has been produced for the entirety of the
arrangement as this most accurately reflects the nature of the
transaction.
The provisional goodwill arising on the acquisition has been
capitalised and is being amortised over 10 and 20 years, in accordance
with its estimated useful life.
Adjustments
Provisional
Book value Accounting fair value to
before policy Fair value the group at
acquisition alignment adjustments acquisition
#000 #000 #000 #000
Net assets of subsidiaries acquired can be summarised as
follows:
Tangible fixed assets 1,382 - (787) 595
Stock of units and shares 430 - - 430
Cash & bank 30,371 - - 30,371
Debtors 17,582 - (535) 17,047
Deferred tax asset - 1,421 - 1,421
Creditors - (2,376) (20,173)
(17,797)
Estimated Net Assets of acquired companies 31,968 1,421 (3,698) 29,691
Goodwill arising on acquisition 219,425
249,116
Discharged by:
Cash payment 235,688
Settlement of inter-company balances 4,191
Initial consideration 239,879
Estimated further consideration* 3,737
Estimated expenses of acquisition (of which #1,038,000 is 5,500
accrued)
249,116
* Subject to agreement of the Completion Accounts.
The directors consider the fair values of the Net Assets to be
provisional until the RSA Investments Completion Accounts review process
has been completed. In the meantime the adjustments reflect the
directors' best estimates of fair value adjustments to the Net Assets of
the acquired companies.
The following specific adjustments have been made to reflect the
fair value of assets acquired on acquisition:
(a) The book value of tangible fixed assets has been
reduced to reflect the directors' assessment of the
realisable value of information technology assets at the
date of take-on.
(b) Debtors have been reduced to their estimated realisable
value, to reflect that doubt exists as to the
recoverability of certain balances.
(c) The deferred tax asset had been recognised to align the
accounting policy (FRS 19: deferred tax) of the
subsidiaries acquired to the policy already adopted by
the ISIS group.
(d) The increase in creditors reflects obligations of the
acquired entities which are considered to exist as at 1
July 2002, but which were not reflected in the Completion
Accounts.
Since the date of acquisition, exceptional costs of #19,169,000
have been incurred in reorganising, restructuring and integrating the
business. The directors consider the exceptional costs, which relate to
a fundamental reorganisation of the business, are non-operating in
nature.
Two loan facilities have been put in place to fund the acquisition:
(i) A loan of #180,000,000 from Friends Provident Life and
Pensions Limited. Interest on the loan is payable every six months
at the 4 1/2 year SWAP Rate plus 0.575% per annum. The loan is due
to be repaid in full on 1 November 2006.
(ii) A revolving credit facility of #50,000,000 with
Friends Provident plc. The loan may be drawn down in tranches of
#5,000,000. Interest on the loan is payable quarterly at 3 month
LIBOR plus 0.6% per annum. The daily undrawn and uncancelled amount
of the facility has a commitment fee payable at the rate of 0.3% per
annum. The facility will terminate on 30 May 2007, or earlier if
notice of termination is given by ISIS Treasury Limited and the
outstanding element of the loan is reduced to nil.
The full #180,000,000 fixed rate loan plus #20,000,000 of the
#50,000,000 revolving credit facility were utilised, along with existing
cash resources, to fund the initial consideration of #239,879,000.
8. The financial information set out above for the year ended 31
December 2002 and 31 December 2001 are abridged accounts in terms of the
Companies Act 1985. The financial statements for both years received an
unqualified audit opinion. The financial statements for the year ended
31 December 2001 have been filed with the Registrar of Companies.
9. Copies of the 2002 Report and financial statements will be posted
to shareholders in March 2003 and will be available for inspection at
Eighty George Street, Edinburgh, EH2 3BU.
This information is provided by RNS
The company news service from the London Stock Exchange
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