Annual report Lock Lower Holding AS

Transcription

1 Annual report 2014 Lock Lower Holding AS

2 Contents Key figures 4 Board of Director's report 5 Consolidated Income statement 13 Consolidated Statement of financial position 14 Consolidated Statement of changes in Shareholders' equity 15 Consolidated Cash flow statement 16 Notes to the consolidated financial statements 17 1 General information 17 2 Summary of significant accounting policies 17 3 Critical accounting estimates 27 4 Financial risk management 28 5 Segment information 32 6 Employees, salaries and other remuneration 34 7 Audit fees 35 8 Financial income and costs 36 9 Income tax Fixtures and furniture Intangible assets Goodwill (a) Financial instruments by category (b) Credit quality of financial assets Purchased loans and receivables Other long-term assets Trade receivables Other short-term receivables Cash and short-term deposits Share capital and premium Group companies Trade payables Other short-term liabilities Borrowings Other long-term liabilities Derivative financial instruments Post-employment benefits Provisions for other liabilities and charges Pledged assets, contingent assets and liabilities Commitments Business combinations Related party disclosures Events after the reporting date 55 Page 2

3 Parent Company Income statement 56 Parent Company Statement of financial position 57 Parent Company Statement of changes in shareholders equity 58 Parent Company Cash flow statement 59 1 Parent Company Accounting principles 60 2 Parent Company Audit fees 60 3 Parent Company Financial Items 60 4 Parent Company Income tax 61 5 Parent Company Subsidiaries 62 6 Parent Company Cash and Short-term deposits 62 7 Parent Company Related Party 62 8 Parent Company Equity 62 9 Parent Company Borrowings 63 Audit Report 64 Page 3

4 Key figures Key figures, EURm unless otherwise stated* 22 May - 31 Dec 2014 Net revenues 130 EBITDA 26 EBITDA margin (%) 20% EBITDA excl. NRI's 52 Adjusted EBITDA 64 Adjusted EBITDA excl NRI's 90 NIBD, end of period** 1,659 NIBD/ adj. EBITDA** 4.2 ERC, end of period 1,971 Investments in Debt Purchasing 75 Return in Debt Purchasing 14% Gross collection in Debt Purchasing 95 Average number of FTEs 2,988 * Lock Lower Holding AS was established 22 May 2014 and acquired Lindorff through Lock AS 6 October 2014 hence no comparative numbers reported. **NIBD is based on actual bond structure in the reported period. See note 4.2 Page 4

5 Board of Director's report The Board of Directors of Lock Lower Holding, Corporate Identity Number , hereby presents the Annual Report and Consolidated Financial Statements for the period 22 May 31 December The Lindorff Group Lock Lower Holding AS was established 22 May 2014 in Oslo, Norway and acquired 100% of Lock AS at 15 July The group had no operating activities until 6 October 2014 when Lock AS acquired 48,3% of Lindorff AB, 100% of Indif AB (owner of 51,7% of Lindorff AB), 72,9% of Lindorff Coinvest AB and 50% of Lindorff Institutional Management AB. Except for Lindorff AB s subsidiaries, the other undertakings had no operating activities and their only assets were investments or loans to Lindorff AB and Lindorff Second Holding AB. After these transactions Lock Lower Holding AS and its subsidiaries (hereafter named Lindorff or Lindorff group) holds 100% ownership of all companies within Lindorff Group. The parent company Lock Lower Holding AS is domiciled in Oslo, Norway, with office address at Hoffsveien 70B, 0377 Oslo. Lindorff, from a small Norwegian office founded in 1898, has grown into one of the largest and fastest growing debt-collection companies in Europe, with clear international ambitions. The company has unique industrial knowledge and has a balanced and flexible business model with a full service offering. Lindorff is not only the market leader in the Nordic region, but also the leading Credit Management Services provider to financial institutions in Europe. Lindorff is present in Denmark, Finland, Germany, Italy, the Netherlands, Norway, Spain, Sweden, the Baltic States (Estonia, Latvia, and Lithuania) and Russia. Lindorff s services enable our clients to concentrate on core activities Our range of services comprises the entire value chain from customer selection to the purchase of receivables. Lindorff s products and services help improve our clients cash flow and profitability, and allow clients to focus on their core activities. Our current service offering includes: reminders and debt collection purchase of debt receivables selection and scoring of potential customers customer and credit information invoicing solutions Lindorff is continually striving to develop its products and services and to find new ways of solving customer needs. Our clients growing focus on cost efficiency, as well as demand for more efficient processes and faster product development, has contributed to the growth of business process outsourcing. Our services enable clients to focus on their core activities and also provide more flexibility. Lindorff focuses mainly on the sectors such as financial institutions, telecommunications, retail, energy and the public sector. Significant events during 2014 The acquisition of Lindorff Group was completed at 6 October 2014 at a transaction price of EUR 1,184m based on an enterprise value of EUR 2,300m. Post closing CEO Endre Rangnes resigned and Peter Sjunnesson was appointed interim CEO. In connection with Nordic Capital Fund VIII s acquisition of Lindorff, the current funding package of EUR 840m was terminated and a new funding package consisting of Super senior RCF of EUR 255m, Senior Secured Bonds of EUR 1,002.5m and Senior unsecured Bonds of EUR 450m was put in place. The current Board of Directors was elected 21 November 2014 and consists of Chairman Scott Danielsen, and board members Siv Farstad and Geir-Inge Skålevik In December 2014 Lindorff acquired a debt recovery business from a financial institution in Spain, which is the largest transaction in Lindorff s history. The acquisition price was EUR 159m. The agreement includes the provision of services for the management and collection of past-due receivables by Lindorff Spain, for an initial period of ten years. The acquisition further strengthens our strong Spanish organisation and demonstrates Lindorff s ability to provide solutions across the Credit Management Services value chain to Page 5

6 our clients within Financial Institutions. This acquisition, in addition to the previous Lindorff acquisitions in 2013, 2012 and 2011, provides a solid platform for our Debt Collection business in Spain going forward. As part of our growth strategy, Lindorff last year entered the Italian market through a portfolio acquisition from Deutsche Bank. Collection on the acquired portfolio is outsourced to a third party collection agency. Events after reporting date Klaus-Anders Nysteen was appointed new CEO at 16 March Interim CEO Peter Sjunnesson continues as Board member in Lock TopCo AS and Lock AS. Financial review The reporting period is 22 May 31 December 2014 for the parent company. Consolidated financial statements include Lindorff group and the other acquired companies from 6 October 31 December There were no operations before the Lindorff acquisition. As 2014 is the first year of operations for Lock Lower Holding AS there are no comparable figures. Net revenue Consolidated net revenue in 2014 amounted to EUR 130m. Revenues and earnings are generated from activities in the Debt Collection, Debt Purchasing and Other segment. The result from operating activities (EBIT) amounted to EUR 21m Revenues and operating earnings by operating segments Debt collection Revenues in Debt Collection in 2014 amounted to EUR 95m, whereof EUR 68m was revenue for services to external parties and EUR 27m was commission from collection on portfolios on behalf of the segment Debt Purchasing. The Segment Earnings was EUR 41m (43%). Debt Collection accounted for 52% of net revenue and 58% of segment earnings. Debt Purchasing Cash collection from Purchased loans and receivables amounted to EUR 95m. Net revenue was EUR 58m, including revaluation of purchased debt of EUR 1m. Direct operating expenses were EUR 30m whereof EUR 27m was commission to Debt Collection. The Segment Earnings was EUR 28m (48%). Debt Purchasing accounted for 45% of net revenue and 39% of segment Earnings. The group invested EUR 75m in loans in the period 6 October 31 December The return in Debt Purchasing was 14% for the reporting period, somewhat lower than target due to increased carrying value from investments which have not yet significantly contributed to earnings. Expenses Operating expenses amounted to EUR 104m including non-recurring items of EUR 26m caused by incremental cost for acquisition of Lindorff, severance payment related to change of management and exit cost. Staff costs were 48% of the total operating costs. Operating margin was 20%. Several measures were taken in 2014 in order to consolidate locations, increase efficiency and reduce staff costs going forward. Depreciation/amortisation The result for the period was charged with amortisation and depreciation EUR 5m whereof EUR 1m on tangible assets and EUR 4m was amortised on intangible assets, mainly consisting of client contracts and software related assets. The carrying amount of fixed assets was EUR 331m, whereof EUR 319m intangible assets. Net financial items Net financial items amounted to a net expense of EUR 66m whereof EUR 46m was interest expense on bonds. Foreign exchange differences have had a negative impact on net financial items of EUR 17m. Taxes Income tax expense for the reporting period was EUR +15m (income). Lindorff Group has tax issues related to deductibility of interest of group internal loans in Finland and Norway. Tax exposure of these cases is estimated at EUR 37m including EUR 6m of potential penalties, whereof EUR 1.5m and EUR 21m were paid to the respective tax authorities in Norway and Finland in the beginning of Lindorff contests the claims and has filed complaints to Page 6

7 the Tax Authorities in both countries. No provisions have been recorded as Lindorff believes that our arguments are strong and hence our standing in the disputes is solid. Lindorff s assessment is that the tax expenses will, over the next few years be approximately 25% of profit before tax, excluding the outcome of any tax dispute. For further information regarding tax, see note 9. Research and development Lindorff has ongoing several development projects of unique software related to improve and streamline our operations and services offered to our customers. During the reporting period this comprise the following projects Capital management system Global Data Warehouse New collection system for several countries Digital channels Invoicing Cash flow and investments Cash flow from operating activities was EUR 44m. Negative cash effect of increased working capital relates to build-up of operations related to the acquisition in Spain. Net cash used in investing activities at EUR 1,422m relates mainly to acquisition of Lindorff of EUR 1,184m and the collection unit in Spain of EUR 159m. Funding The acquisition of Lindorff Group was financed through equity increase of EUR 639m and issued bonds. In connection with Nordic Capital Fund VIII s acquisition of Lindorff, the previous bank funding package of EUR 840m was terminated and a new funding package consisting of Super Senior RCF of EUR 255m, Senior Secured Bonds of EUR 1,002.5m equivalent (issued in EUR and NOK) and Senior Notes of EUR 450m equivalent (issued in EUR and SEK) were put in place. On 4 November an additional bond issue of EUR 250m was finalized. The latest issue was split between a senior secured floating tranche of EUR 100m (EURIBOR + 5.5%) maturing in 2020, and a senior secured fixed tranche of EUR 150m (7%) maturing in Companies of the group representing more than 80% of EBITDA as of 31 December 2013 have provided security for the RCF and the Bond package through pledge of shares, bank accounts, receivables and a guarantee for the commitments under the RCF and the Bond package. Average interest rate on the previous bank facilities was 4.9% YTD Q Average interest rate on the new facilities will be approx. 7.5% with an average duration of 7 years. Goodwill Goodwill is monitored by management on group level. Consolidated goodwill amounted to EUR 1,378m at the end of the year and is calculated based on the preliminary purchase price allocation from the acquisition of Lindorff Group and including currency translation. Final purchase price may be reallocated within 12 months after acquisition. Financial position, risk and risk management The Group s and Parent Company s risks include, among other things, strategic risks related to economic development and acquisitions, regulatory changes, possible errors and omissions and financial risk such as market risk, financing risk and credit risk inherent in Purchased loans and receivables and counter party risk for third party business. The group s liquidity is good. The financial position of the parent company and group is strong. The company has through its interest rate hedging policy minimized the risk of adverse effects from changes in the market s interest rates have a negative outcome on the group s cash flow. The Board considers that the management of Lindorff s total financial risk, comprising market risk as well as credit and liquidity risk is satisfactory. The group s cash flow currency exposure is limited through a natural alignment of Lindorff s interest-bearing loans relative to operational cash flows denominations. The group operates internationally and is exposed to transaction risks on acquisitions/disposals and other transactions involving foreign currency. The currency exposure is primarily in NOR, EUR, SEK and DKK. Page 7

8 Financial risk factors Group financial risk is limited, with strong cash flow from the Debt Purchasing business combined with limited investments needed in the Third Party Collection business. Lindorff`s funding and financial risk are managed within the group in accordance with the Treasury policy. The Treasury policy contains rules for managing financial activities, measuring and identifying financial risk and limiting these risks. Internal and external financial operations are concentrated in Group Treasury, which ensures economies of scale when pricing financial transactions. Market risk The services and products offered in the respective local geographical markets are subject to strict local laws and regulations including requirements for debt collection licenses. The main market risk is related to general macroeconomic conditions and local rules and statutory regulations in each of the geographical markets the group is present in and which affect the debtors ability to pay and the vendors ability and willingness to sell portfolios of loans and receivables and potential commission from third party collection. Foreign exchange risk The group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to NOK (Norwegian krone) and SEK (Swedish krona) compared to the group s internal and external reporting currency EUR. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. For further description of foreign exchange risk, see note 4. Interest rate risk Interest rate risks relate primarily to the group s interest-bearing net debt. The external debt amounted to EUR 1,729m at 31 December The funding consists of bonds and a revolving credit facility. The bonds are a mix of fixed rate and floating rate bonds, share of fixed rate bonds are 56%. The floating rate bonds are tied to the market rate, with quarterly interest fixing. The group manages its interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Under the interest rate swaps, the group agrees with other parties to exchange, at specified intervals (quarterly), the difference between fixed contracts rates and floating-rate interest amounts calculated by reference to the agreed notional amounts. The hedge ratio (fixed rate bonds + swaps) was 71% at 31 December A one-percent increase in market interest rates would have adversely affected net financial items by approximately EUR 8m. A five-percent increase would have adversely affected net financial items by EUR 38m. Credit risk Credit risk is the risk that Lindorff`s counterparties are unable to fulfil their obligations to the group. Each local entity is responsible for managing and analysing the credit risk for each of their new clients before standard payment and delivery terms and conditions are offered. Credit risk arises from assets such as cash and cash equivalents, guarantees and derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables; Purchased loans and receivables and outlays on behalf of clients. For financial assets owned by Lindorff, no collateral (very limited) or other credit reinforcements have been received. The maximum credit exposure for each class of financial assets therefore corresponds to the carrying amount. There is also a limited risk of loss linked to the group s Third Party Debt Collection and the risk is primarily carried by the client. Portfolios of purchased loans and receivables To minimize the risks related to purchase of non- performing claims, a stringent investment process with tight price discipline is exercised in purchase decisions. Purchases are usually made from clients with whom the group has maintained long-term relationships and therefore has a thorough understanding of the receivables in question. Purchased loans and receivables are usually purchased at prices significantly below the nominal value of the receivables, and are not collateralised. Lindorff retains the entire amount collected, including interest and fees. For further description of risk, see note 4. In order to continue minimising the credit risk exposure, Lindorff continues to invest in staff with a broad experience in credit management, and focus on increased analytical approach to portfolio assessments. Monitoring processes are implemented to follow up actual collection compared to forecasts. In addition, the group s investment in effective IT systems and a more uniform crossborder business model will result in better control of the group s business, which in turn will also help reduce the risk of credit loss. Liquidity risk Liquidity risk is the risk that the group does not have the ability to fulfil its short and long-term payment obligations to outside parties. The group s financing risk is minimized through long term financing in the form of committed lines of credit. The group s loan Page 8

9 facilities ensure funding to meet future payment obligations. As of 31 December the group held unused facilities totalling EUR 177m (net of guarantees EUR 156m). Cash flow forecasting is performed in the operating entities of the group and aggregated by Group Treasury. Group Treasury monitors rolling forecasts of the group s liquidity requirements to ensure it has sufficient cash to meet operations needs while maintaining sufficient headroom on its undrawn committed borrowing facilities (note 24) at all times so that the group does not breach borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting takes into consideration the group s debt financial plans, covenant compliance, compliance with internal balance sheet ratio targets and, if applicable external regulatory or legal requirement. Capital management The group s objectives when managing capital are to safeguard the group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The group s external rating from Standard & Poor s Rating Services is BB and from Moody s Investor Service is B2. Corporate Governance Strong corporate governance is about having systematic decision-making processes, clear responsibility hierarchy, avoiding conflict of interest and satisfactory internal controls, risk management and transparency. Internal control and risk management regarding financial reporting Internal control and risk management regarding financial reporting are designed to provide reasonable assurance about the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, applicable laws and regulations, and other requirements for bond listed companies. The Board of Directors and the Chief Executive Officer are ultimately responsible for ensuring that internal controls are developed, communicated to and understood by the employees of the Group who undertake the individual control activities, and that the control activities are monitored, enforced, updated and maintained. The Group has implemented EIT (Enterprise Information Tool), to control, report and monitor that internal controls are performed in compliance with internal control guidelines. Articles of association Appointment and replacement of Board members follows from the Norwegian Companies Act. The Board is not given mandate to acquire and convey own shares or issue convertible instruments. Environmental concerns and corporate social responsibility Lindorff has a strong global commitment, anchored in our core values and the way we run our business. Lindorff employees are citizens of the world and are genuinely concerned with creating a better future - for those in need of support and for the generations to come. Since 2003, Lindorff has supported Plan International's dedicated struggle to give children around the world a better life by supporting several projects in Senegal, Bolivia, Tanzania and West Africa. The last years we have focused on one project across all our countries: Learning for Life - building a school in Liberia. Lindorff chose the school project, since education is crucial for development and one of the most powerful tools in breaking the cycle of poverty. Lindorff has since 2006 partnered with the non-profit NGO FAIR (Fair Allocation of Internet Resources). FAIR aids developing countries by supplying resources within ICT. The equipment from the Lindorff offices in Norway, Sweden and Denmark has supported projects to improve the ICT development in Eritrea, Africa. Our business does not lead to contamination of the environment covered by specific regulations, but we have several green initiatives, including carbon, waste and water, to increase our environmental responsibility. Lindorff avoids unnecessary travel and promotes the use of video and telephone conferences. When purchasing products or services, we emphasize high environmental quality. The Environmental Policy addresses how we shall manage and control environmental issues in our operations and services. Page 9

10 Anti-corruption and anti-money laundering Our business is affected by a number of laws and regulations in the jurisdictions in which we operate. We have detailed policies and country specific procedures in place that are designed to ensure that we operate in compliance with applicable anti-corruption and anti-money laundering regulations, and compliance issues, if any, are identified and appropriately elevated within the organization. Our policy regarding regulatory compliance defines, among other things, governing principles regarding identification of governing laws and regulations, delegation of compliance responsibilities, guidelines on education and competence, testing, documentation and monitoring of regulatory compliance control measures. Personnel organisation and management Year end 2014, Lindorff had a worldwide staff 3,040 employees in its twelve countries of operations. The consolidated results include subsidiaries in which the parent company directly or indirectly holds more than 50% of the votes. Average number of employees in proportion of males and females Total Male Female Male% Female% Average 3,040 1,128 1,912 37% 63% Sickness absence Absence due to sickness was 4.92% of total work hours during the reporting period. Social responsibility and the environment The group is actively involved in programs concerning competence development, coaching and culture. The group also has a strong focus on health, environment and job satisfaction. Follow-up of sickness absence and taking the relevant measures is an important area of concern for the group. There were no cases of serious work accidents during Lindorff has a strong commitment to fair treatment and equal opportunity in the workforce. As of year-end 2014 the proportion of women and men in the group was 63% and 37% respectively. Remuneration Board of Directors: No fees were paid to Board members for the reporting period. CEO Endre Rangnes resigned as CEO at 21 October Termination agreement included severance payment of EUR 857k. Peter Sjunnesson was engaged as interim CEO at 21 October The CEO compensation is a fixed monthly fee, covering all direct and indirect cost related to the position. He has no severance payment included in the agreement. Senior Executives All senior executives receive a fixed annual salary and variable compensation. The variable compensation is, with a few exceptions, up to 30% of the annual base salary and is based on the results achieved by Group operating earnings, results in their area of responsibility and individual performance objectives. Lindorff has agreements with certain members of the management on severance payment equal to six to twelve months of base salary. Compensation committee The CEO has appointed a Committee to handle compensation issues. The committee is comprised of the CEO, CFO and SVP HR. Regarding remuneration in reporting period, see note 6. Outlook Lindorff is a leading European provider of credit management services with a flexible business model and full service offering. The volume of Purchased loans and receivables was at a high level in Lindorff will continue to utilise its unique position in the Nordic region for further expansion in Continental and Eastern Europe. The group s ambition is to continue its growth outside the Nordic region through a combination of organic growth and acquisitions. The group aims to grow both through its debt collection activities and through portfolio purchases. Page 10

11 The economic situation in Europe builds demand for Lindorff s services. The deals entered into in 2014 represent a big step to reach the strategic goals and proves that Lindorff is a preferred company to large European banks looking for a professional partner with impeccable track records and high ethical standards. It is the Board s view that Lindorff is well positioned for future profitable growth and to continue to develop as a leading credit management service providers. The group s staffs has a solid track record in both acquiring and integrating companies in recent years and the group has longstanding relationships with our existing customer base. The Board emphasizes that outlook considerations always is connected with uncertainty. Parent company The parent company is a holding company with no employees or activities. Net result for the year was EUR 0m. Shareholders Lock Lower Holding AS is 100% owned by Lock Upper Holding AS, Corporate Identity Number , Ultimate parent company is Cidron 2013 Ltd, 26 Esplanade, St Helier Jersey JE2 3QA. Proposed distribution of earnings Parent company: To the Annual general meeting are the following funds available (EURk): Share premium reserve 759,777 Currency translation differencies -17 Profit for the period 22 May 31 Dec Total non-restricted equity 759,982 The Board of Directors proposes that the total non restricted equity of EUR 759,982k is carried forward. Unrestricted equity for the group is EUR 795m. The group and parent company s profit and loss and financial position are presented in the subsequent Income statements, Statements of financial position and notes. Going concern In accordance with the Norwegian Accounting Act 3-3a, we confirm the going concern assumption forming the basis for the preparation of the financial statements. This assumption is based on profit forecasts for the year 2015 and the Group s long-term strategic forecasts. The Group s economic and financial position is sound. Confirmation from the Board of Directors and CEO We confirm that, to the best of our knowledge, that the financial statements for the period from 22 May to 31 December 2014 has been prepared in accordance with approved accounting standards and gives a true and fair view of the Group and the Company s consolidated assets, liabilities, financial position and results of operations, and that the Report of the Board of directors provides a true and fair view of the development and performance of the business and the position of the Group and the Company together with a description of the key risks and uncertainty factors that the company is facing. Page 11

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13 Consolidated Income statement EURm 22 May - 31 Dec 2014 Revenue Total income Employee benefit expense 6-50 Legal fee cost -9 Phone, postage and packaging -4 Other operating costs 7-41 Depreciation and amortisation 10,11-5 Results from operating activities (EBIT) 21 Finance income 8 0 Finance costs 8-66 Net finance costs -66 Profit and loss before tax -45 Income tax expense 9 15 Profit and loss for the year -30 Profit (loss) attributable to: Owners of the Company -30 Profit and loss for the year -30 Consolidated statement of comprehensive income 22 May - 31 Dec EURm 2014 Profit (loss) for the year -30 Other comprehensive income: Items that will not be reclassified to the income statement Remeasurements of post employment benefit obligations gain(+)/loss (-) 26-3 Tax on remeasurement of post employment benefit obligations Items that may be subsequently reclassified to the income statement Currency translation differences 69 Other comprehensive income for the year, net of tax 66 Total comprehensive income for the year 35 Attributable to: Owners of the Company 35 Total comprehensive income for the year 35 The accompanying notes are an integral part of these financial statements Page 13

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15 Consolidated Statement of changes in Shareholders' equity EURm Notes Share capital Share premium Retained earnings Total equity Balance as at 22 May Profit/loss for the year Other comprehensive income for the year: Remeasurements of post employment benefit obligations Translation differences Total comprehensive income for the year Capital increase/(reduction) Group Contribution 0 0 Balance as at 31 December The accompanying notes are an integral part of these financial statements Page 15

16 Consolidated Cash flow statement EURm Notes 22 May - 31 Dec 2014 Cash flows from operating activities: Results from operating activities (EBIT) 21 Non-cash items: Amortisation, depreciation and impairment Revaluation of purchased loans and receivables 14-1 Cash items: Amortisation of purchased loans and receivables Interest paid -5 Corporate income tax paid 9-7 Cash flows from operating activities before changes in working capital 52 Cash flows from changes in working capital: Decrease/increase in accounts receivable 16 2 Decrease/increase in other receivables 17 3 Decrease/increase in accounts payable 21-1 Decrease/increase in other current liabilities Net cash generated from operating activities 44 Cash flows from investing activities: Acquisition/disposal of subsidiaries Acquisition of receivables -255 Acquisition of tangible fixed assets 10-3 Acquisition of intangible fixed assets Acquisition of financial assets -94 Net cash used in investing activities -1,422 Cash flows from financing activities: New share issue 639 Increase in long-term liabilities 23 1,740 Amortisation long-term debts Net cash used in financing activities 1,481 Net (decrease)/increase in cash and cash equivalents 102 Currency effect -4 Cash and cash equivalents at the beginning of the year 18 Cash and cash equivalents at end of year The accompanying notes are an integral part of these financial statements Page 16

17 Notes to the consolidated financial statements 1 General information The parent company Lock Lower Holding AS is a registered company domiciled in Oslo, Norway with office address at Hoffsveien 70B, 0377 Oslo, Norway. The company is 100% owned by Lock Upper Holding AS, Hoffsveien 70B, 0377 Oslo. The ultimate parent is Cidron 2013 Ltd, 26 Esplanade, St Helier Jersey JE2 3QA. Lock Lower Holding (the company) and its subsidiaries (together the group) have two core business segments; Debt Purchasing and Debt Collection. The Debt Purchasing segment consists of the acquisition, management and collection of unsecured nonperforming loans. The Third Party Debt Collection segment consists of contingency collection for various clients. Other services include invoice and loan administration. The group has offices in 12 countries Denmark, Finland, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Russia and the Baltic States (Estonia, Latvia, Lithuania). The consolidated financial statements of the group for the period ended 31 December 2014 were authorised for issue in accordance with a resolution of the Board of Directors on 22 April 2015 and will be presented to the Annual General Meeting in May Summary of significant accounting policies 2.1 Basis of preparation The consolidated financial statements of Lock Lower Holding and all its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as approved by the EU and interpretations set by the International Accounting Standards Board (IASB) and the annual accounts act. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. The consolidated financial statements have been prepared on a historical cost basis except for financial derivatives that have been measured at fair value through profit or loss. The Parent Company s functional currency is in Norwegian Krone (NOK) and the presentation currency for the Parent Company and for the group is Euro (EUR). The consolidated financial statements are presented in EUR and all values are rounded to the nearest million (EURm) except when otherwise indicated. The consolidated and parent company accounts pertain to 22 May to 31 December for income statements and 31 December for items on the statements of financial position. IFRS1 First-time Adoption of International Financial Reporting Standards As the parent company was established the 22 May 2014, the annual report is prepared in accordance with IFRS1. Lindorff Group, acquired 6 October 2014, implemented IFRS in 2013 and the exception of IFRS1.D17 is applied, stating that if an entity becomes a first-time adopter later than its subsidiary the entity shall, in its consolidated financial statements, measure the assets and liabilities of the subsidiary at the same carrying amounts as in the financial statements of the subsidiary, after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary Changes in accounting policy and disclosures Financial statements for the period ended 31 December 2014 are the first financial statement for Lock Lower Holding Group. For information regarding Lindorff previous years see Lindorff First Holding AB Annual report The group has adopted all new and revised standards and interpretations issued by IASB and IFRIC and approved by EU if relevant to the business and come into force for the accounting year starting 1 January The following standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2015, but have been applied in preparing this consolidated financial statement: IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains, but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investment in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI no recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. The standard is effective for accounting periods beginning on or after 1 January 2018, with early adoption permitted. 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18 The group has decided against early application of the following new or amended accounting recommendations or interpretations that enter into force in or after 2015 as none of these is expected to have a significant effect on the consolidated financial statements of the group. Below is a short description of the new standards and interpretations: IFRS 15 was issued in May It deals with revenue recognition and establishes principles for reporting useful information used to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. The revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good and service. The standard replaces IAS 18 Revenue. The Standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted. The group is assessing the impact of IFRS Basis of consolidation The consolidated financial statements comprise the financial statements of the group and its subsidiaries as at 31 December Subsidiaries are consolidated from the date of acquisition, being the date on which the group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if it results in a deficit balance. Subsidiaries The consolidated financial statements comprise the financial statements of Lock Lower Holding AS and entities where the group has controlling interest (subsidiaries). Controlling interest is achieved when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The Company obtains and exercises control through direct or indirect voting rights. Controlling interest will normally exist when the Company has voting rights of more than 50% through ownership or agreements. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. These financial statements are for consolidation purposes restated to IFRS. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of control is obtained and until the control ceases. Intercompany transactions, balances, revenues and expenses are eliminated in consolidation. This also applies for unrealized internal gains and losses. The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred. Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. There is a reassessment of the allocation of the acquisition price within 12 months after the acquisition date when the initial accounting for a business combination can be determined only provisionally. Page 18

19 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CEO. The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. The group is organised in two main operating segments: Debt Purchasing and Debt Collection. The Debt Purchasing segment consists of acquisition and management of mainly unsecured non-performing loans and receivables. The Debt Collection segment consists of collection for various clients and on portfolios of loans and receivables owned by Debt Purchasing. The Other group segment relates to the remaining head office expenses and amortisation of intangible assets, as well as revenues not related to the operating segments. The geographical areas specified represent 10% or more of the total revenue from external customers and intersegment sales. 2.4 Foreign currency translation The consolidated financial statements are presented in EUR, which is the group s presentation currency. Items included in the financial statements of each of the group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: a) assets and liabilities for each statement of financial position presented (i.e. including comparatives) are translated at the closing rate at the date of the financial position; b) income and expenses for each income statement (i.e. including comparatives) are translated at average exchange rates and c) all exchange differences are recognised in other comprehensive income Transactions in foreign currencies are initially recorded in the functional currency rate at the date of the transaction or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in income statement within finance income or costs. Foreign exchange gains and losses on non-monetary financial assets and liabilities such as financial liabilities at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income. 2.5 Tangible assets Tangible assets are recognised at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment. Such cost includes the cost of replacing part of such tangible assets when that cost is incurred if the recognition criteria are met. Depreciation is calculated on a straight-line basis over the useful life of the assets. The useful lives of tangible assets, machinery and fixtures are three to five years. The carrying value of tangible assets is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An item of tangible assets is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. The asset s residual values, useful lives and methods are reviewed, and adjusted if appropriate, at each financial year-end. 2.6 Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. The group s intangible assets are assessed to be finite except goodwill and brand. Intangible assets with finite lives are mainly amortised on a straight-line basis over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, Page 19

20 as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement as an expense and included in Amortisation of intangible fixed assets. (a) Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the group s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the noncontrolling interest in the acquiree. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes. The operating segment level is Debt Purchasing and Debt Collection. However, when acquiring a company a PPA is prepared and the fair value of assets and liabilities are allocated to the different assets. Loans and receivables are recognised at fair value at the acquisition date. The goodwill allocated in full to the Debt Collection segment. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of the goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed. (b) Brand Any debt collection contracts awarded for reasons other than price alone is considered to be a result of brand name. Lindorff brand is well known and respected and ensures us to be invited to participate in competitive tender offers we otherwise might not be eligible to. Brand arose on acquisition of subsidiary and got measured on initial recognition at cost. Of the three main approaches to value the brand - Income, Market and Cost, Relief and Royalty income approach was consider to be the most appropriate method for brand valuation. Brand is assumed to have an indefinite useful life and impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. (c) Client relationships Client relationships include the rights related to collection contracts with a third party and got measured on initial recognition at cost. Client relationships contract are amortised straight line over their useful economic lives. (d) Internally developed software Costs associated with maintaining computer software programs are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the group are recognised as intangible assets when the following criteria are met: - it is technically feasible to complete the software product so that it will be available for use; - management intends to complete the software product and use it; - there is an ability to use or sell the software product; - it can be demonstrated how the software product will generate probable future economic benefits; - adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and the expenditure attributable to the software product during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software product include employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Computer software development costs recognised as assets are amortised over their estimated useful lives, which does not exceed five years unless strong indication of a longer useful life is demonstrated (for instance by an underlying contract). 2.7 Impairment of non-financial assets Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash generating units). Prior impairments of non-financial assets other than goodwill are reviewed for possible reversal at each reporting date. An assessment is made as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss Page 20