CHAIRMAN'S OPEN LETTER - PART THREE
Please find below the third part of the Chairman's response to fans' questions.
Chairman's Letter (Watford Leisure PLC 2007 Annual Report)
In addition to my official and therefore more formal Chairman's Statement covering the year to 30 June 2007, the Board and I wanted to explain in more detail what has happened financially to the Club over the five year period since my appointment as Chairman of Watford Leisure PLC ("the Company") on 25 September 2002. We believe that having a broader understanding of the Company's finances is both necessary and in-keeping with our stated approach of being as communicative as possible.
When I moved up from director of the Watford AFC Limited ("the Club") to Chairman of the Company our financial position was without exaggeration parlous. In July 2002 we had sold and leased back the stadium at Vicarage Road and the day before my appointment we had announced in an update to the Stock Exchange that we needed to raise at least £9.5 million to avoid administration. I and other members of the Club and Company boards had given verbal commitments to take equity in a future fundraising and then on 26 September 2002 the majority of professional players and more highly paid members of staff agreed to a 12 per cent pay deferral.
In November 2002 I subscribed along with my fellow directors sufficient funds to allow the fundraising to proceed.In December 2002, at the suggestion of our advisers, I was joined on the Board by Andy Wilson who, with his invaluable financial experience, has since contributed significantly to the Club.
What became apparent through 2003 was that as a result of ongoing problems, not least the settlement we reached with Gianluca Vialli in July of that year, we needed to raise further funds to maintain the solvency of the Club. As a consequence in March 2004 we raised a further £5.25m by way of a placing of equity and convertible loan stock, to which I and Lord Ashcroft subscribed further funds and we welcomed Jimmy and Vince Russo as substantial shareholders and directors of the Company.
In June 2004 we were joined by Mark Ashton who became the CEO of the Club. As many of you will be aware I have regarded this appointment as significant as that of Aidy Boothroyd for the future success of the Club. Mark's appointment was followed in August 2004 by the re-purchase of Vicarage Road for £7.6m.
As a Board we set about re-building the Club and the business model from top to bottom in order to achieve the objectives that I set out in my Chairman's report in 2002/3. These objectives were:
1) Achieve promotion to the Premier League
2) Repay wages owed to players and other staff
3) Return value to our shareholders
4) Buy back the freehold of the Vicarage Road stadium
5) Develop a new East Stand
At this point I would like to direct your attention to the table below. This sets out the key figures over my five year tenure as Chairman and the results I reported for the year ended June 2002 (a period when I was not Chairman, albeit a director of the Club).
|
01/2 £m |
02/3 £m |
03/4 £m |
04/5 £m |
05/6 £m |
06/7 £m |
Cumulative Total £m | |
|
Turnover |
16.8 |
8.7 |
8.5 |
8.5 |
8.5 |
29.9 |
|
|
Operating (loss)/profit before player trading |
(4.6) |
(7.6) |
(3.9) |
(2.5) |
(6.6) |
3.1 |
|
|
(Loss)/profit after tax |
(7.2) |
(10.3) |
(4.5) |
(2.1) |
(5.6) |
8.0 |
(21.7) |
|
Net debt |
(1.4) |
(6.9) |
(7.3) |
(8.5) |
(5.7) |
(5.6) |
|
|
Equity raised* |
5.5 |
4.8 |
4.2 |
1.9 |
5.2 |
- |
21.6 |
What is starkly set out in this table is that in the five years of my tenure as Chairman we have operated for four of them on a turnover that is significantly out of line with the cost base and that is insufficient to sustain the Club in the upper reaches of the Championship let alone the Premiership. As you can see during the six years covered, cash raised from shareholders effectively funded the losses of the Club. In addition the increase in net debt to a peak of £8.5m roughly corresponded to our major capital investment during that period - the re-purchase of Vicarage Road.
However we began to turn a corner in 2004 with the operating loss cut to £2.5m.Player salaries were pared to the bone and it is of great credit to Ray Lewington that he achieved the success he did in the Cups on such a constrained basis. As a Board we kept faith with the players and ensured that the proceeds of the 2004/5 cup run were used to payback in full all of the salary deferrals entered into in 2002.
Because we could see our way to eliminating the trading loss the Board felt comfortable investing in players when Aidy Boothroyd arrived. Nevertheless both Marlon King and Darius Henderson would not have joined us without further support from me and the Russos in the form of increased shareholder loans.
At this stage I would like to re-iterate the gratitude we, as a Club, have to both Jimmy and Vince Russo for their contribution to Watford. Our disagreements have been the subject of much media comment but I have no hesitation in placing on record the appreciation I, as Chairman, had for their whole-hearted support for the Club.
Hence we arrived at the start of the 2005/6 season in good shape - knowing that we still needed to eliminate the trading loss but also convinced that we knew how to do it and that given the confidence of Aidy Boothroyd we had a shot at the Premiership. By mid year it was clear that promotion was a realistic possibility but the Company needed further investment to cover trading losses and to support its effort for promotion and that, if we were to prepare the Club for the Premiership, significant investment was needed on the support side. Hence in 2005/6 the Board agreed to fund these areas. This was a calculated decision backed up by the equity placement in March of that year of £6.2m to Lord Ashcroft, the Russos and myself which meant that we could 'afford' not to be promoted - if that is the right way of putting things. I should also say that the loss for 2005/6 contains a number of bonus payments to the football side that were triggered by our promotion. On a like for like basis ignoring exceptional costs our trading loss for the year actually decreased to £2m.
Some people would say we were lucky to be promoted but I would disagree with one exception; the luck we had was in finding Aidy, for which Mark Ashton must take a large amount of the credit.Given Aidy's abilities, once he was on board we were convinced that we would be promoted within three years. So when it came it wasn't lucky - just premature.
Promotion meant a considerable amount of money and as both shareholders and supporters I believe you are entitled to hear from me why and where we decided to spend our increased income.Firstly we invested in the playing squad both in the summer 2006 transfer window and in January 2007. The cost of the new players together with additional Premiership payroll costs of the existing players, greatly added to the Club's wage bill. However the extra TV and broadcast revenue was supplemented by increased ticketing and commercial revenue such that the Company generated an operating cash flow (after interest) of approximately £4.8m. The uses to which this money was put were as follows:
|
£m | |
|
Net operating cash inflows after interest |
4.8 |
|
Purchase of players |
(5.5) |
|
Sale of players |
3.7 |
|
Capital expenditure |
(2.9) |
|
Loan repayments |
(2.4) |
|
|
|
|
Net cash outflow |
(2.3) |
In addition we have invested in a new point-of-sale catering system, an access control system, the stadium communication network, improved training facilities and in new administrative offices in Tolpits Lane (necessitated by the building work of the key worker housing units at the rear of the Rookery Stand). Lastly the Club took the opportunity to purchase the freehold of the Red Lion pub (opposite the stadium) in September 2006.
Whilst much was achieved on the back of the additional Premiership revenues, as a Board we decided that financially we needed to plan on a worst case scenario over a three year period following relegation from the Premiership. We didn't want to be relegated, we didn't set out to be relegated and believe me it hurt like hell when it happened but we always intended that if we were then Aidy would have the best chance of getting us back into the Premiership.
The first parachute payment therefore has enabled us to retain most of the Premiership squad of players and although we lost Hameur Bouazza to Fulham in August 2007, he was replaced in the same month by Nathan Ellington. Going forward we intend to use the "Premiership" monies in the judicious investment in players and in continuing to invest where possible in the stadium and Club's infrastructure. We also intend to use some of the cash to repay shareholder loans. We do not preclude new shareholder loans but the Board feel that such debts were incurred on market terms and that therefore they should be paid back.
For shareholders the last five years has been a bumpy ride. In September 2002 with the Company days away from administration the recapitalisation effectively valued the Company at approximately £7.5m. Since then a further £11.3m has been invested by shareholders in the Company. The Company's current market capitalization is approximately £13m. I have therefore, not yet achieved my objective of returning value to our shareholders but believe that we are well placed to do so in the near future.
We are now a Company with a stable business base from which to challenge for the Premiership based on an expanded revenue basis. We own our own ground and have a squad of players with significant value. We have the capacity to grow on the Vicarage Road site and in the area surrounding it. Moreover we have the people to achieve our ambitions and it is of this I am most proud. Watford Leisure PLC and Watford Football Club have changed in the last five years not because of me or the Board but because the hard work and commitment of the people who work here both on and off the pitch and it is on that basis that I feel confident that we can achieve all of our strategic objectives.
Graham Simpson
Chairman
