Interim Results

Hornby PLC 11 November 2005 HORNBY MAKING PROGRESS WITH INTERNATIONAL SALES GROWTH Hornby Plc, ('Hornby') the international models and collectables Group, has today announced its interim results for the six months to 30 September 2005. Hornby's two main products in the UK are Hornby model railways and Scalextric slot car racing systems. It also operates a number of overseas subsidiaries including Hornby Italia in Italy and Electrotren in Spain. • Pre-tax profits in line with prior year at £2.52 million (2004: £2.59million) • Diluted earnings per share 4.48p (2004: 4.55p) • Turnover £18.5 million • Hornby Italia, ex-Lima assets performing ahead of expectations • Fernando Alonso - F1 Licence agreed in Spain • Interim dividend increased 15% to 2.3p (2004: 2.0p) Frank Martin, Chief Executive of Hornby, said, ' Despite a challenging economic backdrop, we are continuing to make good progress. Our international subsidiaries are performing ahead of expectations. Hornby Italia, the ex-Lima business, has a detailed plan in place to re-launch the brand. Given the potential of the re-invigorated European brands we have high hopes for a growth in European sales in the second half of the year. Strategically we are pleased that the group has now diversified and expanded the range of subject matter that we sell into different territories. ' In the UK sales of model trains have remained robust and we have introduced several new locomotives which are performing well in the run up to Christmas. We are also extending the Thomas the Tank Engine range which continues to grow in its appeal. ' New licences remain the life-blood of our business. We are delighted that our Spanish subsidiary has won the exclusive rights to use images of the new Formula One World Champion Fernando Alonso. His victory this year has helped to generate enormous interest in the sport in Spain. Significantly this is helping the profile of our slot car products in Europe, and has provided a major boost to Spanish sales. ' This is an exciting time - despite market challenges, the continued focus on improving the quality of our products is paying off. Hornby products continue to appeal across a broad spectrum of ages. Despite the backdrop of a consumer slowdown in the UK, we are confident that we remain well placed to continue the long-term progress of the Group.' -ends- Date: 11 November 2005 For further information contact: Hornby Plc cityPROFILE Frank Martin, Chief Executive Simon Courtenay John Stansfield, Finance Director Andrew Harris Tel: 01843-233500 Tel: 020-7448-3244 On 11 November - Tel: 020-7448-3244 Web: www.hornby.com or: www.scalextric.com High resolution images are available for the media by contacting Andrew Harris at cityPROFILE CHAIRMAN'S REVIEW The Group continues to make excellent progress towards its objective of building an international Hobby business by broadening the range of brands and markets in which we operate. This in turn reduces our dependency on our UK operations. However, given the well-documented slowdown in UK retail spending, we have not been immune to the effects of a more difficult trading environment in our home market. Against this background total sales declined by 3% to £18.5m. Reporting for the first time under IFRS, profit before tax at £2.5m was broadly in line with the same period last year (£2.6m). This is a pleasing result, given the reduction in sales and the fact that, as previously reported, the Group has carried the costs of the Lima subsidiary during this period, prior to the benefit of revenues from products now being manufactured in China. Diluted earnings per share were similar to the same period last year at 4.48p (2004 - 4.55p). Dividend Your Board is continuing its policy of paying one third of the previous year's full dividend at the half-year. Consistent with this policy, I am therefore pleased to announce a 15% increase in the interim dividend of 2.3p (2004 - 2.0p) per ordinary share, payable on 27 January 2006 for those shareholders on the register as at 6 January 2006. Operating Review As I reported at the Annual General meeting in July we recognised that we may face a wider economic slowdown during the current financial year. However, our brand position and established distribution base in the UK market mean that, whilst sales have been slower, our margins have remained strong. This, coupled with early action to reduce overheads where possible, has enabled the Group to report profits in line with the same period last year. Our overseas subsidiaries have all made good progress in the first half. Our Spanish subsidiary Electrotren has secured wide distribution for our Superslot brand, particularly as a result of securing the image rights to Formula One World Champion Fernando Alonso in relation to our slot-car products in Spain. Some sales benefits have been felt in the first half but the bulk of the revenue gains will come in the second half. Scalextric USA reported an improvement in sales, and this trend is expected to continue in the second half. Hornby Italia, responsible for the Lima brands acquired in December 2004, reported a better result than anticipated as a result of tight overhead control and higher than forecast revenues from stock included in the Lima assets acquired. The product development, marketing and operational infrastructure required for the future development of the business is now in place. Production from China is now starting to arrive in Italy, and we are confident that we can continue to grow the Lima business substantially during the second half of the current financial year and beyond. The economic case for manufacturing model railways and other hobby products outside the main economies of Western Europe continues to be compelling. We believe there will be further opportunities to leverage our experience and expand both brand and geographic market coverage. This would further reduce dependence on any one market. In addition to the encouraging developments in our overseas subsidiaries we have also been active in ensuring that we have access to the best licences to develop and promote our product ranges to the widest possible audience. The Company's net debt position of £3.4m as at 30 September 2005 has increased by £3.1m compared to the previous year. However this position is after payment for the Lima assets of £6.0m. The Company therefore continues to demonstrate its ability to generate significant positive cash flow from its operations. Current Trading Against difficult market conditions in its main market, the UK, your Company has made a creditable start in the current financial year. However market indications for Christmas trading in the UK are not encouraging, and I must therefore sound a cautionary note in respect of trading in the second half. Nevertheless the actions we have already taken towards our longer term objective of building a profitable hobby business across Europe are now beginning to bear fruit. This leaves us better balanced to offset variations in demand in individual markets. We are therefore confident that, notwithstanding the impact of short term pressures on trading, the benefits of the strategic direction we have taken will have positive effects on the Group for a number of years to come. Neil Johnson 11 November 2005 GROUP INCOME STATEMENT for the six months ended 30 September 2005 Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Revenue 18,460 18,970 45,006 Cost of sales (9,043) (9,721) (22,613) ------------------------------------------------------------------------------- Gross profit 9,417 9,249 22,393 Distribution costs (658) (555) (1,312) Selling and marketing costs (4,190) (4,069) (9,508) Administrative expenses (1,842) (1,942) (3,910) Other operating expenses (110) (48) 51 ------------------------------------------------------------------------------- Group operating profit 2,617 2,635 7,714 Finance income 17 32 47 Finance costs (119) (80) (176) ------------------------------------------------------------------------------- Profit before taxation 2,515 2,587 7,585 Taxation (777) (818) (1,993) ------------------------------------------------------------------------------- Profit for the period after taxation 1,738 1,769 5,592 =============================================================================== EARNINGS PER ORDINARY SHARE Basic 4.65p 4.78p 15.06p Diluted 4.48p 4.55p 14.38p GROUP BALANCE SHEET as at 30 September 2005 30 September 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 ASSETS NON-CURRENT ASSETS Goodwill 7,719 4,017 7,751 Intangible assets 1,356 - 1,418 Property, plant and equipment 5,130 4,559 5,096 Deferred income tax assets 205 42 131 ------------------------------------------------------------------------------- 14,410 8,618 14,396 ------------------------------------------------------------------------------- CURRENT ASSETS Stocks 9,568 9,398 7,526 Trade and other receivables 11,910 11,302 7,199 Derivative financial instruments 13 - - Cash and cash equivalents 727 317 1,860 ------------------------------------------------------------------------------- 22,218 21,017 16,585 ------------------------------------------------------------------------------- LIABILITIES CURRENT LIABILITIES Borrowings 4,042 478 23 Trade and other payables 9,181 8,562 7,637 Current income tax liabilities 1,241 1,028 1,100 ------------------------------------------------------------------------------- 14,464 10,068 8,760 ------------------------------------------------------------------------------- NET CURRENT ASSETS 7,754 10,949 7,825 =============================================================================== NON-CURRENT LIABILITIES Borrowings 45 92 80 Provisions for other liabilities and charges 510 686 369 ------------------------------------------------------------------------------- 555 778 449 ------------------------------------------------------------------------------- NET ASSETS 21,609 18,789 21,772 =============================================================================== SHAREHOLDERS' EQUITY Share capital 375 372 373 Share premium 5,010 4,862 4,906 Other reserves 2,475 2,492 2,483 Retained earnings 13,749 11,063 14,010 ------------------------------------------------------------------------------- TOTAL EQUITY 21,609 18,789 21,772 =============================================================================== GROUP STATEMENT OF CHANGES IN EQUITY for the six months ended 30 September 2005 and 30 September 2004, and the year ended 31 March 2005 Capital Share Share Redemption Revaluation Other Retained Total Capital Premium Reserve Reserve Reserves Earnings* Equity (unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited) £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 April 2004 370 4,797 55 757 1,688 11,022 18,689 Profit for the period - - - - - 1,769 1,769 Amortisation of revaluation surplus - - - (8) - 8 - Issue of shares 2 65 - - - - 67 Share based payments - - - - - 49 49 Exchange adjustment offset in reserves - - - - - 41 41 Purchase of own shares - - - - - (278) (278) Shares vested - - - - - 64 64 Dividends - - - - - (1,612) (1,612) -------------------------------------------------------------------------------------------------------------------- Balance at 30 September 2004 372 4,862 55 749 1,688 11,063 18,789 Profit for the period - - - - - 3,823 3,823 Amortisation of revaluation surplus - - - (9) - 9 - Issue of shares 1 44 - - - - 45 Share based payments - - - - - (133) (133) Exchange adjustment offset in reserves - - - - - (15) (15) Dividends - - - - - (737) (737) -------------------------------------------------------------------------------------------------------------------- Balance at 31 March 2005 373 4,906 55 740 1,688 14,010 21,772 Adoption of IAS 32 and IAS 39 - - - - - (38) (38) -------------------------------------------------------------------------------------------------------------------- Balance at 1 April 2005 373 4,906 55 740 1,688 13,972 21,734 Profit for the period - - - - - 1,738 1,738 Amortisation of revaluation surplus - - - (8) - 8 - Issue of shares 2 104 - - - - 106 Share based payments - - - - - 110 110 Exchange adjustment offset in reserves - - - - - (8) (8) Purchase of own shares - - - - - (364) (364) Shares vested - - - - - 138 138 Dividends - - - - - (1,845) (1,845) -------------------------------------------------------------------------------------------------------------------- Balance at 30 September 2005 375 5,010 55 732 1,688 13,749 21,609 ==================================================================================================================== * Attributable to equity holders of the Company. GROUP CASH FLOW STATEMENT for the six months ended 30 September 2005 Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Cash flows from operating activities Cash (utilised in)/generated from operations (1,228) (1,609) 9,222 Finance cost paid (119) (80) (176) Income tax paid (811) (1,354) (2,557) -------------------------------------------------------------------------------------- Net cash (utilised in)/generated from operating activities (2,158) (3,043) 6,489 -------------------------------------------------------------------------------------- Cash flows from investing activities Purchase of trade assets and related costs - - (5,971) Proceeds from sale of property, plant and equipment - 13 227 Purchase of property, plant and equipment (916) (1,107) (2,220) Finance income received 17 32 47 -------------------------------------------------------------------------------------- Net cash utilised in investing activities (899) (1,062) (7,917) -------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from issuance of ordinary shares 106 67 112 Purchase of own shares by STIP (364) (278) (278) Finance lease capital payments (11) (16) (30) Dividends paid to Company's shareholders (1,845) (1,612) (2,349) -------------------------------------------------------------------------------------- Net cash utilised in financing activities (2,114) (1,839) (2,545) -------------------------------------------------------------------------------------- Effect of exchange rate movements 43 2 27 -------------------------------------------------------------------------------------- Net decrease in cash and bank overdrafts (5,128) (5,942) (3,946) Cash and bank overdrafts at beginning of the period 1,860 5,806 5,806 -------------------------------------------------------------------------------------- Cash and bank overdrafts at end of period 3,268 (136) 1,860 -------------------------------------------------------------------------------------- Cash and cash equivalents consist of: Cash and cash equivalents 727 317 1,860 Bank overdrafts (3,995) (453) - ---------------------------------------------------------------------------------------- Cash and bank overdrafts at end of period (3,268) (136) 1,860 ---------------------------------------------------------------------------------------- NOTES TO THE CASH FLOW STATEMENT (a) Cash flow from operating activities Six months Six months Year ended to 30 September 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Profit for the financial period 1,738 1,769 5,592 Taxation 777 818 1,993 Interest payable 119 80 176 Interest receivable (17) (32) (47) Amortisation of intangible assets 51 - 33 Depreciation 899 927 1,850 Profit on disposal of tangible fixed assets - (7) (29) Share based payments 110 49 (84) Gain on financial derivatives (13) - - Movements in provisions 141 159 (158) Changes in stocks (2,042) (2,029) 258 Changes in debtors (4,610) (5,285) (1,171) Changes in creditors 1,619 1,942 809 --------------------------------------------------------------------------------------- Cash (utilised in)/generated from operations (1,228) (1,609) 9,222 ======================================================================================= (b) Analysis of net debt At 30 September 31 March Net Cash Foreign 30 September 2004 2004 Flows Exchange 2005 £'000 £'000 £'000 £'000 £'000 Cash and cash equivalents 317 1,860 (1,176) 43 727 Bank overdrafts (453) - (3,995) - (3,995) --------------------------------------------------------------------------------------- (136) 1,860 (5,171) 43 (3,268) Due within on year: Finance leases (25) (23) (24) - (47) Due after one year: Finance leases (92) (80) 35 - (45) --------------------------------------------------------------------------------------- Net debt (253) 1,757 (5,160) 43 (3,360) ======================================================================================= GEOGRAPHICAL SEGMENT INFORMATION Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) BY ORIGIN £'000 £'000 £'000 TURNOVER United Kingdom 15,312 16,643 39,572 United States of America 1,171 994 2,488 Rest of Europe 1,977 1,333 2,946 -------------------------------------------------------------------------------- Group 18,460 18,970 45,006 ================================================================================ £'000 £'000 £'000 PROFIT BEFORE TAX United Kingdom 2,891 2,458 7,657 United States of America (50) (86) (74) Rest of Europe - operating profit (51) 346 341 - interest (275) (131) (339) (326) 215 2 -------------------------------------------------------------------------------- Group 2,515 2,587 7,585 ================================================================================ £'000 £'000 £'000 NET ASSETS United Kingdom 18,954 16,965 18,881 United States of America 170 198 192 Rest of Europe 2,485 1,626 2,699 -------------------------------------------------------------------------------- Group 21,609 18,789 21,772 ================================================================================ On 15 December 2004 a newly formed subsidiary of Hornby Plc, Hornby Italia s.r.l., acquired the trade and certain assets of Lima S.p.A. The results of this acquisition are included within Rest of Europe in the table above. For the year ended 31 March 2005 turnover was £203,000 incurring a loss before tax of £289,000. BY DESTINATION £'000 £'000 £'000 TURNOVER United Kingdom 12,634 13,537 33,928 Rest of the world 5,826 5,433 11,078 -------------------------------------------------------------------------------- Group 18,460 18,970 45,006 ================================================================================ NOTES: 1. Basis of preparation The interim financial information has been prepared in accordance with the accounting policies the Group expects to be applicable at 31 March 2006 based on those IFRS and IFRIC interpretations issued and effective or issued and early adopted as at the time of preparing these statements. The IFRS standards and IFRIC interpretations that will be applicable at 31 March 2006, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim financial statements. These figures may therefore require amendment to change the basis of accounting or presentation of certain financial information, before their inclusion in the IFRS financial statements for the year ending 31 March 2006, which will be the Group's first full set of IFRS financial statements. The financial statements of the Company and its subsidiaries have been prepared under the historical cost convention, except in respect of certain financial instruments and certain land and buildings that are included in the financial statements at valuation. 2. Non statutory accounts These statements do not constitute statutory financial statements within the meaning of Section 240 of the Companies Act 1985. The financial statements for the year ended 31 March 2005 were prepared in accordance with UK GAAP and have been delivered to the Registrar of Companies and on which the auditors made an unqualified report. The comparative figures for the year ended 31 March 2005 have been prepared as set out above and are an abridged statement of the full financial statements (as restated) for that period. No financial statements will be filed for the six months ended 30 September 2005. 3. Earnings per share The calculation of earnings per ordinary share is based on the profits after taxation for the period of £1,738,000 (six months ended 30 September 2004 - £1,769,000) and the weighted average number of ordinary shares in issue during the period of 37,360,169 (six months ended 30 September 2004 - 37,036,552). The calculation of diluted earnings per ordinary share is based on the weighted average number of ordinary shares in issue as adjusted to assume conversion of all dilutive potential ordinary shares, 38,837,156 (six months ended 30 September 2004 - 38,860,832). 4. Short Term Incentive Plan 164,861 ordinary shares to the value of £364,397 were acquired by the Employee Benefit Trust in June 2005 in accordance with the incentive plan, details of which were included in the 2005 Annual Report and Accounts. The Trust waives its right to dividends. 5. Interim Statement Copies of this statement will be sent to all shareholders and are available from the Company's registered office. 6. International Financial Reporting Standards The interim financial information for the six months ended 30 September 2005 has been prepared in accordance with International Accounting Standards ('IAS') and International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU') (see note 1). References to IFRS throughout the Interim Report refer to the application of International Accounting Standards and International Financial Reporting Standards. Hornby Plc consolidated financial statements were prepared in accordance with UK Generally Accepted Accounting Principles ('UK GAAP') until 31 March 2005. In preparing Hornby Plc 2005 consolidated interim financial information, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of the year ended 31 March 2005 were restated to reflect these adjustments, except as described in the accounting policies. Reconciliations and descriptions of the effect of the transition from UK GAAP to IFRS on the Group's equity and its net income and cash flows are provided in this note. First time adoption of International Financial Reporting Standards The Group will apply IFRS 1 'First Time Adoption of International Financial Reporting Standards' for its initial implementation of IFRS. The Group's date of transition to IFRS is 1 April 2004 and comparative information in the financial statements will be restated to reflect the Group's adoption of IFRS except where otherwise required or permitted by IFRS 1. IFRS 1 requires an entity to comply with each IFRS effective at the reporting date for its first financial statements prepared under IFRS. As a general rule, IFRS 1 requires such standards to be applied retrospectively. However, the standard permits several optional exemptions from full retrospective application. The Group will elect to take advantage of the following exemptions: •The Group will adopt IFRS 3 'Business Combinations' to the extent that it applies to acquisitions after 1 April 2004. Acquisitions before that date will be recorded under previous accounting rules as the Group intends to take advantage of the exemption permitted in IFRS 1. All goodwill will be tested for impairment in accordance with our accounting policy. In addition, the Group will take advantage of the exemption allowed in IFRS 1 which means that IAS 21 'The Effects of Changes in Foreign Exchange Rates' will not apply retrospectively to fair value adjustments and goodwill arising in business combinations that occurred before the date of transition to IFRS. •The Group will elect to take advantage of the exemption in IFRS 1 regarding cumulative translation differences. Accordingly, the cumulative translation differences for all foreign operations are deemed to be nil at the date of transition to IFRS. •The Group will elect to apply the exemptions in IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement', and will apply these standards from 1 April 2005 only. •The Group will elect to take advantage of the exemptions allowed in IFRS 1 regarding IFRS 2 'Share based payments'. The Company will apply the exemptions for share based payments granted on or before 7 November 2002. The Company will meet all the disclosure requirements of IFRS 2. •The Group considers the land and buildings revaluation performed under UK GAAP as comparable to the fair value at the date of the revaluation. Accordingly, the Group has elected to use this valuation as deemed cost at the date of transition to IFRS, and stated the property at valuation, net of accumulated depreciation. •Main impacts of International Financial Reporting Standards •Outlined below are those International Financial Reporting Standards which will have an impact upon the financial statements of Hornby Plc. Details of adjustments are set out in the reconciliations to UK GAAP below. IFRS 3 - 'Business Combinations' The standard deals with accounting for business combinations including goodwill and intangible assets. The Group's previous policy under UK GAAP was to amortise goodwill, which will now cease, and to test for impairment , normally on an annual basis, when there is an indication that the carrying value of an asset might not be recoverable. Where appropriate, in respect of business combinations completed after the date of transition to IFRS, separately identified intangible assets will be valued and will be subject to amortisation. IAS 12 - 'Income Taxes' This standard requires entities to provide for deferred taxation based on temporary differences between the carrying amount of assets and liabilities and their tax base. Consequently, the Group will make additional provision for deferred taxation on tax deductible amortisation on purchased goodwill and deferred tax adjustments in respect of share based payments. IAS 21 - 'The Effects of Changes in Foreign Exchange Rates' Income statements and cash flows of foreign subsidiaries are reported in sterling using average rates of exchange that existed during the accounting period rather than the closing rates at the end of the accounting period as was previously permitted by UK GAAP. IAS 10 - 'Events after the balance sheet date' The standard does not permit dividends declared after the balance sheet date to be recognised as a liability. Consequently, under IFRS, the Company will no longer make provision for dividends not approved by the period end. Actual dividends paid in the period will be charged to shareholders' equity. IFRS 2 - 'Share Based Payments' Previously the cost of awards to employees (including conditional rights) was charged to the income statement over the period to which the employees' performance related. Historically, provision has been made for the cost of awards based on the share price ruling at grant date. Under IFRS 2, share awards will be measured at fair value at grant date and recognised as an expense over the vesting period. The impact of this standard on the financial statements of the Group will be a small reduction in the charge to the income statement for the year ended 31 March 2005 and an equivalent increase in shareholders' funds, net of deferred tax. Additionally there will be a small reduction in the cumulative charge to retained earnings at the date of transition to IFRS. IAS 14 - 'Segment Reporting' As previously, the Group will present segmental reporting based on its three primary geographic regions being the UK, the USA and Rest of Europe. Secondary segments have not been identified. Principal Accounting Policies The principal accounting policies that the Group anticipates adopting in its 31 March 2006 financial statements to be prepared under IFRS, and which have been consistently applied in the preparation of the Interim Report, are set out below. Basis of consolidation The Group financial statements consolidate the financial statements of the Company and all its subsidiaries as at 31 March each year prepared under IFRS using consistent accounting policies. The results of subsidiaries acquired are included in the consolidated profit and loss account from the date control passes. Intra group sales are eliminated on consolidation. Foreign currency translation Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the balance sheet date and any exchange differences are taken to the income statement. On consolidation, income statements and cash flows of foreign subsidiaries are translated into pounds sterling using average rates that existed during the accounting period. The balance sheets of foreign subsidiaries are translated into pounds sterling at the rates of exchange ruling at the balance sheet date. Gains or losses arising on the translation of opening and closing net assets are recognised in the statement of changes in equity. Tangible fixed assets Land and buildings are shown at cost or valuation less accumulated depreciation. Assets revalued prior to the issue of FRS15 are retained at their book amounts as though they were the historical cost amounts. Depreciation is provided at rates calculated to write off the cost or valuation, less any estimated residual value, of each asset on a straight-line basis (with the exception of tools and moulds) over its expected useful life, as follows: Freehold buildings - 30 to 50 years Plant and equipment - 5 to 10 years Motor vehicles - 4 years Residual value is calculated on prices prevailing at the date of acquisition or revaluation where this has taken place. Tools and moulds are depreciated at varying rates in line with the related estimated product sales on an item-by-item basis up to a maximum of 4 years. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill recognised under UK GAAP prior to 1 April 2004, the date of transition to IFRS, is stated at net book value as at this date. Goodwill on business combinations recognised subsequent to 1 April 2004 is tested annually for impairment and carried at cost less accumulated impairment losses. (b) Trade names Trade names are capitalised at fair value as at the date of acquisition. They are carried at their fair value less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the fair value of trade names over their estimated economic life of 20 years. (c) Existing customer relationships Existing customer relationships are capitalised at fair value as at the date of acquisition. They are carried at their fair value less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the fair value of customer relationships over their estimated economic life of 10 years. (d) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new products) are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Other development expenditures are recognised as an expense as incurred. Stocks Stocks are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Net realisable value is based on the anticipated selling price less further costs expected to be incurred to completion and disposal. Provisions are made against those stocks considered to be obsolete or excess to requirements on an item-by-item basis. There are no significant differences between balance sheet and replacement cost values. For these purposes replacement cost is based upon latest invoice prices before the balance sheet date. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within current liabilities on the balance sheet. Deferred income tax Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income tax relating to items recognised directly in equity are recognised in equity and not in the income statement. Pension costs During the year the Group operated a defined contribution money purchase pension scheme under which it pays contributions based upon a percentage of the members' basic salary. The scheme is administered by trustees either appointed by the Company or elected by the members (to constitute one third minimum). Contributions to defined contribution pension schemes are charged to the income statement according to the year in which they are payable. Share option scheme The Group operates an executive share scheme. For all grants of share options and awards, the fair value as at the date of grant is calculated using an appropriate option pricing model and the corresponding expense is recognised over the vesting period. The Company has taken advantage of the transitional provisions of IFRS 2 'Share Based Payments' in respect of equity-settled awards and has applied IFRS 2 only to equity settled awards granted after 7 November 2002 that had not vested before 1 January 2005. Short term incentive plan (STIP) The STIP investment is carried at the cost of the shares acquired less the cost of the shares vested. This investment in own shares is presented as a deduction from shareholders' funds. The matched element of the STIP which has a condition of employment attached to it is spread over the vesting period of the shares and recognised in the income statement over this period. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the balance sheet date. If material, provisions are determined by discounting the expected future cash flows of the Group at rates that reflect current market assessments of the time value of money. Revenue recognition Revenue comprises the fair value of the sale of goods and services, net of value-added tax, rebates and discounts and after eliminating sales within the Group. Revenue is recognised as follows: (a) Sales of goods Sales of goods are recognised when a Group entity has delivered products to the customer; the customer has accepted the products; and collectibility of the related receivables is reasonably assured. (b) Sales of services Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction, assessed on the basis of the actual service provided as a proportion of the total services to be provided. (c) Royalty income Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements. (d) Sales returns The Group establishes a sales returns provision at the period end that reduces income in anticipation of customer returns of goods sold in the period. Leases The Group enters into operating and finance leases. Assets held under finance leases are initially reported at the fair value of the asset with an equivalent liability categorised as appropriate under creditors due within or after one year. The assets are depreciated over the shorter of the lease term and their useful economic lives. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance. Rentals are apportioned between finance charges and the reduction of the liability, and allocated to net interest. Assets under operating leases are charged on a straight-line basis over the lease term. Derivative financial instruments From 1 April 2004 to 31 March 2005 In accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, the Group has elected not to apply IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement to the period ended 31 March 2005. The Group has continued to adopt UK GAAP in the accounting for and disclosure of financial instruments in that period. The derivative instruments used by the group to manage its currency risk are forward rate contracts. Forward currency contracts entered into with respect to trading transactions were accounted for under UK GAAP as hedges, with the instruments impact on profit not recognised until the underlying transaction was recognised in the profit and loss account. The notional amounts of interest rate swaps and forward currency contracts were not recorded on the balance sheet. From 1 April 2005 onwards Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of the hedged items. (a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (b) Derivatives that do not qualify for hedge accounting Certain derivative instruments are not considered effective and do not qualify for hedge accounting. Such derivatives are classified as at fair value through the income statement, and changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. Reconciliation of IFRS Income Statement Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Profit for the period per UK GAAP 1,484 1,768 5,156 Share-based payments (110) (49) 84 Amortisation of goodwill reversal 358 1 297 Amortisation of intangible reversal - - 35 Amortisation of intangible assets (51) - (33) Financial derivatives 13 - - Taxation 6 49 53 -------------------------------------------------------------------------------- Profit for the period under IFRS 1,738 1,769 5,592 ================================================================================ Reconciliation of Balance Sheet - UK GAAP to IFRS At 1 April 2004 At 30 September 2004 At 31 March 2005 UK GAAP Effect of IFRS UK GAAP Effect of IFRS UK GAAP Effect of IFRS IFRS IFRS IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 ASSETS NON-CURRENT ASSETS Goodwill 4,017 - 4,017 4,016 1 4,017 7,503 248 7,751 Intangible assets - - - - - - 1,367 51 1,418 Property, plant and equipment 4,436 - 4,436 4,559 - 4,559 5,096 - 5,096 Deferred income tax assets 240 (240) - 259 (217) 42 344 (213) 131 ------------------------------------------------------------------------------------------------------------------ 8,693 (240) 8,453 8,834 (216) 8,618 14,310 86 14,396 ------------------------------------------------------------------------------------------------------------------ CURRENT ASSETS Stocks 7,369 - 7,369 9,398 - 9,398 7,526 - 7,526 Trade and other receivables 5,977 - 5,977 11,302 - 11,302 7,199 - 7,199 Cash and cash equivalents 5,806 - 5,806 317 - 317 1,860 - 1,860 ------------------------------------------------------------------------------------------------------------------ 19,152 - 19,152 21,017 - 21,017 16,585 - 16,585 ------------------------------------------------------------------------------------------------------------------ LIABILITIES CURRENT LIABILITIES Borrowings - 30 30 453 25 478 - 23 23 Trade and other payables 8,443 (1,656) 6,787 9,330 (768) 8,562 9,525 (1,888) 7,637 Current income tax liabilities 1,443 - 1,443 1,028 - 1,028 1,100 - 1,100 ------------------------------------------------------------------------------------------------------------------ 9,886 (1,626) 8,260 10,811 (743) 10,068 10,625 (1,865) 8,760 ------------------------------------------------------------------------------------------------------------------ NET CURRENT ASSETS 9,266 1,626 10,892 10,206 743 10,949 5,960 1,865 7,825 ================================================================================================================== NON-CURRENT LIABILITIES Borrowings 103 - 103 92 - 92 80 - 80 Deferred income tax liabilities - 26 26 - - - - - - Provisions for other liabilities and charges 527 - 527 686 - 686 369 - 369 ------------------------------------------------------------------------------------------------------------------ 630 26 656 778 - 778 449 - 449 ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ NET ASSETS 17,329 1,360 18,689 18,262 527 18,789 19,821 1,951 21,772 ================================================================================================================== SHAREHOLDERS' EQUITY Share capital 370 - 370 372 - 372 373 - 373 Share premium 4,797 - 4,797 4,862 - 4,862 4,906 - 4,906 Other reserves 2,500 - 2,500 2,492 - 2,492 2,483 - 2,483 Retained earnings 9,662 1,360 11,022 10,536 527 11,063 12,059 1,951 14,010 ------------------------------------------------------------------------------------------------------------------ TOTAL EQUITY 17,329 1,360 18,689 18,262 527 18,789 19,821 1,951 21,772 ================================================================================================================== IFRS Adjustments At At At 1 April 2004 30 September 2004 31 March 2005 £'000 £'000 £'000 Goodwill - per UK GAAP 4,017 4,016 7,503 Amortisation written back - 1 297 Lima intangibles fair value adjustment - - (49) -------------------------------------------------------------------------------- 4,017 4,017 7,751 -------------------------------------------------------------------------------- Goodwill amortisation relating to acquisitions prior to 1 April 2004 and charged to profit since that date have been reversed. Goodwill related to Lima assets acquired was reduced and reallocated to intangible assets. Intangible assets - per UK GAAP - - 1,367* Amortisation written back - - 35 Lima intangibles fair value adjustment - - 49 Amortisation of fair value - - (33) -------------------------------------------------------------------------------- - - 1,418 -------------------------------------------------------------------------------- Intangible assets amortisation relating to acquisitions prior to 1 April 2004 and charged to profit since that date have been reversed. Intangible assets related to Lima assets acquired increased upon fair valuing. Intangible assets relating to acquisitions post 31 March 2004 are amortised over their useful life. * Shown in the 31 March 2005 Report and Accounts within goodwill. Deferred Income tax assets - per UK GAAP 240 259 344 Accelerated capital allowances 9 23 63 Short term incentive plan (73) (52) (108) Share options - 12 29 Revaluations (227) (225) (222) Pensions 15 15 14 Trade discount 3 3 3 General provisions 7 7 8 -------------------------------------------------------------------------------- (26) 42 131 -------------------------------------------------------------------------------- Borrowings - per UK GAAP - 453 - Finance lease commitments < 1 year 30 25 23 -------------------------------------------------------------------------------- 30 478 23 -------------------------------------------------------------------------------- Finance lease capital commitments due in less than one year. Trade and other payables- per UK GAAP 8,443 9,330 9,525 Finance lease commitments transferred to borrowings (30) (25) (23) Dividend reversal (1,626) (743) (1,865) -------------------------------------------------------------------------------- 6,787 8,562 7,637 -------------------------------------------------------------------------------- Dividends accrued but not declared, proposed or approved are reversed. Retain earnings - per UK GAAP 9,662 10,536 12,059 Dividend reversal 1,626 729 2,588 Dividend payment - 14 (723) Amortisation of goodwill reversal - 1 297 Amortisation of intangibles reversal - - 35 Amortisation of intangibles fair value - - (33) Deferred taxation (266) (217) (213) -------------------------------------------------------------------------------- 11, 022 11,063 14,010 -------------------------------------------------------------------------------- INDEPENDENT REVIEW REPORT TO HORNBY PLC Introduction We have been instructed by the Company to review the financial information for the 6 months ended 30 September 2005 which comprises the group interim income statement, the group interim balance sheet at 30 September 2005, the group interim cash flow statement, the group statement of changes in equity for the six months then ended and the related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the Group will be prepared in accordance with the accounting standards adopted for use in the European Union. This interim report has been prepared in accordance with the basis set out in note 1. The accounting policies are consistent with those that the directors intend to use in the next annual financial statements. As explained in note 1, there is, however, a possibility that the directors may determine that some changes are necessary when preparing the full annual financial statements for the first time in accordance with accounting standards adopted for use in the European Union. The IFRS standards and IFRIC Interpretations that will be applicable and adopted for use in the European Union at 31 March 2006 are not known with certainty at the time of preparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2005. PricewaterhouseCoopers LLP Chartered Accountants Gatwick 11 November 2005 This information is provided by RNS The company news service from the London Stock Exchange

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