Chairman's Statement for the Year Ended 31st May 2004
I reported to shareholders at last year's Annual General Meeting of Cambridge United Football Club Limited that we would have to be at our very best to survive the difficult financial times that lay ahead.
We entered the 2003/04 year on the back of an operating loss before finance and amortisation of players in the previous year of £472,035 and an overall loss of £704,308.
The year 2003/04 proved to be equally challenging but I am, however, able to report a slight improvement in our trading performance. For the year ended 31st May 2004, the business produced an operating loss before finance and amortisation of players of £433,217 resulting in an overall loss of £571,115.
This huge loss, however, is an 18% improvement year on year but remains way too high. We, therefore, will have to continue with our strategy of cost reductions and we will continue to seek major reduction opportunities in all areas of the company's business.
At last year's Annual General Meeting I made the following commitments to shareholders:
- We will continue to focus on cost management and productivity improvement
- We will ensure playing salaries are contained to no more than 50% of annual income
- We will continue investing in arguably one of the best youth development schemes in the Football League
- We will continue our strategy to bring income and expenditure into balance by 2005/06
- We will seek to develop major new revenue streams and we have targeted the Far East as one such opportunity
- We will work closely with supporters' organisations to ensure customer satisfaction is a priority
I would like, this year, to report on the progress during the year by taking each of those commitments in turn:
1. We will continue to focus on cost management and productivity improvement
2003/04 proved to be a very difficult year on the field and we struggled to get away from the bottom of the league table for most of the season. This performance put pressure on our income but, overall, it still grew by almost 1% year on year. The income highlights were the long awaited return of a modest level of transfer receipts at just below £300,000 and, despite the on field problems, a 7% increase in commercial revenue to £700,195 was achieved. These income increases were unfortunately offset by a drop of 12.5% in gate receipts and a drop of 22% in central distributions from the Football League.
We, were, however able to contain our overall costs and indeed show a slight reduction year on year. Our playing costs reduced by a further 5% from last year's low but we spent an additional 9% in the commercial areas trying to grow non playing revenues. I regret to inform you that, for performance reasons, we decided to replace our Commercial Manager in the autumn of 2003 but, unfortunately, the replacement we recruited failed to meet the improved targets we set and also left our employment at the end of the year.
We now have a new Commercial Manager in place and Heather is already addressing a number of key issues in our commercial operations. She is able to call on advice and guidance from Edward Freedman who we have retained in an honorary capacity. For those of you who do not know, Edward has previously held directorships responsible for the commercial and marketing areas at both Manchester United and Tottenham Hotspur and brings us access to enormous knowledge, expertise and contacts.
2. We will ensure playing salaries are contained to no more than 50% of annual income
The Football League introduced player salary capping almost two years ago and set the cap at 50% for League Two clubs. I am pleased to confirm that we have managed within the prescribed cap throughout that period. Last year the basic salaries of our players represented 26.8% of our annual income and, when bonuses, other player payments and employment costs are added the total still only represents 36.2% of our annual income.
3. We will continue investing in arguably one of the best youth development schemes in the Football League
Our youth development system continues to go from strength to strength and this was, once again, reflected in our performance in the FA Youth Cup where we exceeded our excellent achievements of the previous two seasons by reaching the fifth round of this competition for the first time. Ricky Duncan and Kit Carson are to be congratulated again for not only maintaining, but also improving, our successful youth policy.
We also introduced a number of youth team players to first team action including Darren Quinton, Stephen Smith, Dave Daniels, Dan Gleeson, Ryan Lockett and John Ruddy.
These young players are the lifeblood of the company and I am very pleased to report that they are all progressing well. Of course it has been widely publicised that one of them is already attracting serious interest from a number of top Premiership clubs.
4. We will continue our strategy to bring income and expenditure into balance by 2005/06
At an EGM of the company's members on 29th November 2004 I announced that income and expenditure remained too far out of balance. We certainly improved the balance in 2003/04 but we need to take further, major re-structuring action to give us any chance of meeting the above commitment.
These actions will be painful to implement but necessary if we are to stand any chance of long term survival in an industry that has become much harder for the small football clubs to survive in. The actions we have to take will include reductions to our workforce - both playing and non-playing employees - and will be implemented by July 2005.
5. We will seek to develop major new revenue streams and we have targeted the Far East as one such opportunity
We continue our investigations into new revenue generating ventures associated with the Far East generally and China in particular. As I indicated at last year's AGM, and as I have continually stated in public, it is likely that the development of a revenue stream from activities in China will take at least two years to materialise. We will attempt to earn some income from these activities in 2005/06 but a more realistic timeframe would be 2006/07.
We have recently been granted planning permission for an IT education centre to be located at the Abbey Stadium. We intend to commence this activity during 2005 and we are modelling it on a number of similar ventures that have been successful in other parts of the country for professional football clubs. These similar ventures have produced in excess of £50,000 annually for their host football clubs.
We will, additionally, continue to seek other new revenue generating activities to make your company less reliant on pure football revenues. One such opportunity currently being explored is the staging of an open air, live music concert (or series of concerts) to be held at the Abbey in the summer. Results of the feasibility study into this should be available by the end of January. If it is feasible our plan would be to make this an annual event starting in 2005.
6. We will work closely with supporters' organisations to ensure customer satisfaction is a priority
Relationships with supporters' organisations, and notably CFU and CUSA, were difficult during 2003/04 primarily because of the financial circumstances we were faced with in December 2003. The Directors asked the club's supporters, via CFU, if they could raise £100,000 towards the loan that was due for repayment in December 2003.
I am pleased to report that the CFU 'Bridge the Gap' campaign was successful and I was able to announce, two days before the loan repayment was due, that the tremendous efforts by supporters, coupled with increased investments from the Directors and a number of other activities, would enable the loan to be repaid. As a result, the money raised by the supporters enabled CFU to purchase additional shares in the company and thus qualify for appointing a 'fans elected Director' to the Board - which they did in February 2004. I am pleased to report that the company's first ever fans elected Director, Brian Attmore, has been a valued member of your Board of Directors ever since.
Many of our supporters were not 100% clear what the purpose of 'Bridge the Gap' was and they assumed that it was not only to help repay the loan but also to ensure no players would need to be sold. Clearly that would have required substantially more money to be raised but, nevertheless, that was their belief.
The relationship with some of our supporters therefore, and with CFU in particular, became strained at the end of 2003 due to the sale of Dave Kitson to Reading FC. The sale was necessary in order to provide much needed working capital to enable the company to continue to trade but many supporters either felt that Dave had been undersold or felt a sale was not necessary. In the circumstances at the time of the sale, the Directors believed they had no choice but to accept the best of four offers that had been received.
Over time the sale of Dave should produce a minimum of £250,000 for the company and it could produce even more. Given the depressed state of the transfer market within the Football League, the Board felt the sum achieved represented a realistic valuation and a reasonable return on investment.
Summary of the trading year
As stated earlier, the results for the year ended 31st May 2004 show an operating loss before finance and amortisation of players of £433,217 resulting in an overall loss of £571,155. Whilst this overall loss is just over an 18% improvement year on year, it remains far too high. The main performance indicators are:
- Gate receipts were down £106,673 (12.5%) on the previous year as a result of the difficulties experienced on the field up to our change of football management in March 2004. Gate receipts were also adversely impacted as a result of a) our early exit from the FA Cup following the previous year's reasonably successful campaign, b) our early exit from the Carling (Football League) Cup following the previous season's financially successful campaign and c) our early exit from the LDV Vans Trophy following the previous season's campaign that saw us reach the southern area final.
- Central distributions from the Football League were down 22% to £349,042 which is a drop of £866,457 per annum (71%) compared to the level in 2001/02. Given the 2001/02 level represented 39% of the company's then annual income; it is this factor, more than any other, which has given the company such a difficult challenge of continuing to stay in business in recent years. Finding cost savings of this magnitude (our historic loss of £500,000 annually plus a further sum of almost £900,000 annually) is a challenge that clearly can not be met overnight especially when, at the same time, our ability to earn substantial income from player transfers has been severely impacted. Reducing costs by £1.4 million annually is virtually impossible for a business of our size so we do need major sources of new income if the company is ever to be self financing.
- Commercial revenues were up £48,103 (7%) on the previous year's record high but commercial costs rose by £39,306 (9%) as a result of increasing the number of commercial resources in attempt to drive much higher revenues. Whilst the commercial contribution therefore increased by £8,797 overall it was always going to be a very difficult task to continue the record growth of the previous two years.
- Playing costs for the year were once again reduced bringing this area of cost down by a further £78,025 (5%) and players' salaries were operated well below the new playing salary cap of 50% introduced by the Football League.
- Costs overall were down by 1%.
In view of the continued forecast losses, we entered 2003/04 knowing that a new, substantial injection of cash into the business for working capital would be needed if the Club was to be able to complete its fixtures during the 2003/04 football season. Existing bridging finance would also need to be replaced.
The Directors and the club's supporters provided welcome new equity capital during the year and the Sterling Consortium loan was replaced in December 2003 as a result of this new equity injection along with further loan finance that would be due for repayment within twelve months, i.e. by December 2004.
Our management team of John Taylor and Dale Brooks found it difficult to manage on a further reduced playing budget and, regrettably in March 2004, we agreed terms with John Taylor to terminate his contract. At that time the Directors believed that the likely outcome of not making the change of management would have been relegation to the Conference. Given the company's financial situation, such an outcome would put at high risk the ability of the company to continue to trade as relegation would potentially add a further £800,000 or more burden a year on the company.
In what was reported as a bold move, we quickly brought in both Claude Le Roy to manage first team affairs, and Herve Renard as his assistant and first team coach, to change our on the field fortunes.
They had eight games to protect the club's Football League status and I am pleased that those eight games were played in promotion form ensuring we finished a respectable thirteenth place in the league table. We confirmed Herve's appointment as Manager at the end of the season as well as confirming Claude's agreement to become our first ever Director of Football on an honorary basis.
We once again maintained our investment in our highly successful youth policy as we rely more and more on success in this area to provide the majority of our first team playing squad. Last season our youth team enjoyed their best ever run in the FA Youth Cup (following two successive seasons reaching the fourth round) and we reached the fifth round beating Millwall and Leicester City along the way before eventually going out of the competition by the odd goal away to Swindon Town.
I was delighted that Claude and Herve gave John Ruddy his league debut at the age of seventeen on the last day of the 2003/04 season. He saved a penalty on that debut away against Leyton Orient and showed us a glimpse of what we could look forward to. For a young footballer, who had not been playing in the goalkeeping position for very long, this was a great achievement and I know we, and many other football fans throughout the country, will see and hear a lot more of this gifted young man in the future. I am certain he has a tremendous professional career ahead of him.
We submitted a revised planning application to Cambridge City Council at the end of October 2003. We had hoped that the application would be determined by February 2004 - or March 2004 at the very latest. Unfortunately planning consent was not granted until June 2004 and then the consent was conditional. As a result of the delay, the tenants we had lined up for some of the commercial space had cooled and, to date, alternative tenants have not been found. Until we have tenants contractually secured we can not start the proposed, or any modified, redevelopment of the Newmarket Road End of the Abbey Stadium.
I have repeatedly reported to shareholders and supporters alike that we can not continue to operate the business in the way it had been operated in the past. The changes that needed to be made take time to action and, whilst we have made major changes over the last three years, we continue to have to do more and more each year as this business (at least at the Football League level) has more and more income squeezed away from it.
We have, once again, had to implement a number of difficult changes during 2003/04. The implementation was not without a fair degree of pain but it was absolutely necessary. Despite all of the difficult decisions we continued to make during 2003/04, we must recognise that similar, difficult decisions will be needed, more than ever before, to be made in the future. Downsizing and restructuring in all areas of the business will be necessary and the Board will not shy away from any decision that helps the company survive in the short term and gives it the opportunity to prosper in the long term.
As I stated last year, we still have very difficult financial challenges to meet and I can not predict any easing of these challenges in the next couple of years. We will, however, work hard to ensure that we can get our overall financial performance to be broadly in balance from 2005/06 onwards as previously planned.
I would like to take this opportunity to thank all those people who have provided invaluable co-operation and support in what continues to be the most difficult period in this club's history.
Firstly my thanks to our fans for supporting us through thick and thin. My thanks to all those fans that have continued to support CFU and, by doing so, enabling CFU to help the Club meet the challenges that lie ahead. Some fans have been critical of the Board claiming both it and I are anti CFU. That could not be further from the truth and the Board and I have continually encouraged CFU - right from its initial inception.
CFU's potential role in the future of the company is clear. They will, however, only be able to fulfil that role by having more members, more financial support and more supporters willing to work hard for both CFU and the club. I would, therefore, encourage all Cambridge United supporters to become involved with CFU (and ultimately the club) in whatever way they can.
Secondly my thanks once again go to our employees (management, players, coaching staff and all the other 'back room' staff) who continue to demonstrate their loyalty and commitment to this club.
Thirdly my thanks go to all of our commercial sponsors for providing the much needed commercial revenue streams without which this club would not be able to continue.
Fourthly my thanks to the whole Board of Directors because without their experience and support I would have found a very difficult task an impossible one.
The future
I can not close this report without commenting on 2004/05 to date. I will update shareholders on the first half, ended 30th November 2004, financial performance at the forthcoming AGM but, in summary, I can report that the financial pressures have not eased and have indeed increased.
Some of this increased pressure is a result of our League position and it is with great regret that, less than half way through the current season, we have had to part company with Herve Renard following the departure of Dale Brooks four weeks earlier. Results had not been as we expected and in the end difficult decisions have to be made based on results.
I will never forget working with Herve and I would like to put on record what a hard working, totally honest and highly principled Manager he was. He will remain a true friend and we would like to wish him every success in the future - a success that he will so much deserve. Similarly Dale had been a loyal servant of the Club over a number of years and we also wish him every success in the future. Ricky Duncan took over first team affairs on a caretaker basis until we appointed a replacement for Herve. On 28th December 2004 I was pleased to announce the appointment of Steve Thompson as our new Manager.
Clearly Steve faces a very difficult task. He knows what needs to be done - he has done it before at other clubs. He knows what we need to do it - through his extensive contacts around the leagues we hope he can find what we need.
He does not believe we need a lot - most of our squad have the capabilities, they just need the passion, organisation, motivation and belief. He has our full support and we have already begun to see the improvement.
My belief in teamwork remains. Our team over the last twelve months has had to undergo many changes and keeping 'United' has been more and more difficult. We all have to work even harder on our 'United' approach as the consequences of not being 'United' are unthinkable. I still can not confidently predict exactly when the difficult financial times will be over. Naturally we can not confidently predict League survival either.
If we are to survive to enjoy the successes again we must remain "United in Endeavour".
Gary Harwood
25th January 2005
Previous features:
In Conversation With John Howard (November 2004)
In Conversation With Brian Attmore (November 2004)
In Conversation With Dale Brooks (August 2004)
In Conversation With Gary Harwood (August 2004)
In Conversation With Herve Renard (August 2004)
Season Preview - team by team (July 2004)
Redevelopment - The Way Forward (June 2004)
End of Term Report 2003/04 (May 2004)
Randall Butt - The End of an Era (May 2004)
Gary Harwood's New Year Statement (January 2004)
'Bridge The Gap' - The Background (December 2003)
Abbey Stadium Plans Unveiled (October 2003)
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