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Hornby PLC (HRN)

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Wednesday 22 June, 2016

Hornby PLC

PRELIMINARY RESULTS AND TURNAROUND PLAN

RNS Number : 8892B
Hornby PLC
22 June 2016
 

HORNBY PLC

HORNBY ANNOUNCES PRELIMINARY RESULTS AND TURNAROUND PLAN

 Hornby Plc ("Hornby"), the international models and collectibles Group, has today announced its results for the year ended 31 March 2016, together with a turnaround plan for the business and a refinancing to support the plan. 

Results Highlights

-    Revenue of £55.8 million down 4% (2015: £58.1 million)

-    Underlying loss before tax*, in line with expectations, of £5.7 million (2015: £1.6 million profit)

-    Exceptional items of £7.9 million (2015: £0.8 million); £5.1 million non-cash, to align balance sheet to new business model

-    Reported loss before tax £13.5 million (2015: £0.2 million loss)

* Stated before amortisation of intangibles (brands and customer lists), net unrealised foreign exchange movements on intercompany loans, and exceptional items.

Post Year-End Events

Announced today:

 Turnaround plan and refinancing

-    Reduce business scale and costs

-    Maintain key brands

-    Focused product range

-    Refine channel strategy and exit concessions

-    Streamline European operating model; leverage central infrastructure

-    £8 million placing to support the delivery of the Group's strategic objectives

-    Renegotiation of banking facilities for three-and-a-half years

Steve Cooke, Hornby Chief Executive Officer, said:

 "Last year was difficult and disappointing as we faced significant challenges during the continued turnaround and improvement of the business.  We were pleased with the progress made in modernising many of our systems and processes, but much of the change last year resulted in substantial unplanned disruption which had a significant adverse impact on trading performance.

"The Board has now completed a thorough review, which has identified that many core parts of the Group are stable, profitable and cash generative, driven by iconic brands with strong market positions.  The review has also identified areas that require fundamental change. The turnaround plan is intended to return the business to sustainable profitability and cash generation." 

 

-ends-

Date:  22 June 2016

For further information contact:

Hornby Plc

Roger Canham, Executive Chairman          

Steve Cooke, Chief Executive

David Mulligan, Interim Finance Director

       

01843 233500

Web: www.hornby.com

Numis Securities (Nomad & Broker)

Oliver Cardigan

Paul Gillam

Tom Ballard

 

020 7260 1000

 

Capital Access Group

Simon Courtenay

 

020 3763 3400

 

Highlights 2016

 

"Last year was difficult and disappointing, as we faced significant challenges during the continued turnaround and improvement of the business.  We were pleased with the progress made in modernising many of our systems and processes but much of the change last year resulted in substantial unplanned disruption which had a significant adverse impact on trading performance.

"The Board has now completed a thorough review, which has identified that many core parts of the Group are stable, profitable and cash generative, driven by iconic brands with strong market positions.  The review has also identified areas that require fundamental change. The turnaround plan is intended to return the business to sustainable profitability and cash generation." (Steve Cooke, Chief Executive)


Revenue (2015: £58.1m)

£55.8m

Operating loss (2015: £0.3m profit)

£(13.1)m

Underlying1 operating loss (2015: £2.1m profit)

£(5.3)m

Reported loss before taxation (2015: £(0.2)m loss)

£(13.5)m

Underlying1 loss before taxation (2015: £1.6m profit)

£(5.7)m

Reported loss after taxation (2015: £(0.1)m loss)

£(13.7)m

Reported loss per share (2015: (0.31)p loss)

(27.87)p

Underlying basic loss per share (2015: 3.38p basic earnings)

(13.02)p

Total dividend per share (2015: nil)

nil

1   Underlying figures are before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and exceptional items.

 

Chairman's Statement

 
• Revenue of £55.8 million (2015: £58.1 million)
• Underlying loss before tax1 of £5.7 million (2015: £1.6 million profit)
• Net debt at 31 March 2016: £7.2 million (2015: £7.5 million)
• Exceptional items of £7.9 million (2015: £0.8 million) including costs relating to the implementation of the ERP
  system, restructuring of the business, refinancing, impairment of tooling and goodwill and a profit on the sale of
  part of the Margate site
• Reported loss after tax £13.7 million (2015: £0.1 million loss)

 

 1   Stated before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and  exceptional items.

 

Personal perspectives

              

The last twelve months have been extremely challenging but I am pleased with the progress made with modernising the business. I believe we have in place the right leadership and a pool of talented people to deliver the plan to return the business to sustainable profit and cash generation.

 

Last year resulted in some strongly contrasting emotions. On the one hand trading was very disappointing with the implementation of the new ERP system and reorganisation of our European businesses disrupting our delivery and our ability to service our customers. However, on the other hand, although it is important to focus on the financial underperformance, we achieved much last year and I am pleased with the progress we have made in improving and modernising the business. I believe we have ended the year in a stronger place following the comprehensive review of the business and commitment to a new clear plan to continue the turnaround of the business.

 

In the UK, as previously announced, sales during the summer of 2015 were disrupted by the implementation of the new ERP system. Trading was then strong during the key Christmas season but weakened dramatically into the new year. Despite the problems, overall external sales increased by 3% year on year and this was key to ensuring that we continued to serve our core Hobby consumers who underpin the strength of our brands in the UK. In addition, we have addressed the supply chain issues that have historically held back the business with the sustained investment in people and strengthening of procurement processes in Hong Kong, where many of our products are manufactured. This leaves the business in an improved position with a leaner operating structure, an ERP system which is helping us to drive improved control, and a supply chain from factory to consumer that has real capability to be scaled as necessary.

 

In Europe trading was severely impacted by problems with the supply of international model rail for much of the first half of the financial year. The European operating model was streamlined during the year with the supply and logistics now being provided through the UK infrastructure at Hersden, by a third party provider. The new business plan will focus sales on its strong and profitable brands and as a result I expect the International business will emerge much stronger and will begin to show sustained trading improvement.

 

Given the challenges we have faced and the resulting disappointing financial performance this year we have undertaken and completed a comprehensive review of the business led by Steve Cooke. This has led to the development of a clear plan to turnaround the business, to move it back to a position of sustainable profit and cash generation and to identify the necessary investment required. This will result in a smaller, more focused business concentrated on our major UK brands and a streamlined European operating model which will be run out of the UK. The plan will be implemented during the course of 2016 and I expect to see the impact of the plan from early 2017.

 

To underpin this plan and to enable the Group to move forwards with the appropriate financing structure in place, we have approached investors to raise additional equity funding of £8 million and have also signed a new three-and-a-half year, £10 million facility with the Group's bankers, which is subject to the completion of the equity raise.

 

I am delighted that we are able to announce today the successful conclusion of these discussions with investors and that the proposed equity raise, which will be put to our shareholders on 8 July 2016. I am highly confident that our shareholders will approve the placing but would draw to your attention the fact that if they are not approved there are serious concerns over the Group's ability to continue as a going concern. The fact that the placing is yet to be approved by shareholders represents a material uncertainty and more detail can be found in the Going Concern paragraphs in the other statements below.

 

Board Changes

On 15 February 2016, we announced that Richard Ames would be stepping down as Chief Executive and leaving the business. I took up the role of Executive Chairman with immediate effect ahead of a permanent appointment. Further to the announcement on 26 April 2016, I have agreed with the Board to remain Executive Chairman at least until the end of the transition period of the new business plan.

On 26 April 2016, we announced that Group Finance Director, Steve Cooke, was appointed Chief Executive. Steve joined the business in June 2015 and has been making a significant contribution as we continue to make progress with our strategy to drive the Group's turnaround.

On 26 May 2016, the Company announced that David Mulligan had been appointed Interim Group Finance Director. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc and has a successful track record of working with companies undergoing change.

 

Following completion of the transaction, the Board intends to immediately begin the process of identifying an additional Non-Executive Director, to further strengthen the Board and to ensure that it remains suitable for the Company's purposes.

 

Shareholder engagement

We will hold our AGM this summer and this will be an excellent opportunity for shareholders to hear more about the new business plan. Personally I am looking forward to welcoming as many shareholders as possible that are able to attend.

I am confident that under Steve's leadership, the Group has the people and plan to build on the foundations for recovery that we have put in place over the last 2 years and to return the business to sustainable profit and cash generation. Once we have completed the changes demanded by the new plan this year, the business will be in a position to grow and succeed into the medium term.

 

Roger Canham

Executive Chairman

22 June 2016

 

Chief Executive's Report

Strategic Review

The recent strategic review identified core parts of the business that are stable and profitable driven by iconic brands.  However, fundamental change is required in other areas to deliver sustainable profit and cash generation. Hornby now has in place a clear plan focused on a smaller number of product lines and streamlined operations which will deliver this change. Pages 4 to 11 set out the strategic report for the business.

Business Model and Strategy

The Group's principal business is the design, development, production and supply of hobby and toy products. The Group distributes its products through a network of specialists through its online activities and multiple retailers throughout the UK and overseas.

 

Review and Turnaround Plan

Last year was difficult and disappointing for Hornby as the business faced into significant challenges during the continued turnaround and improvement of the business. We were pleased with the progress made in modernising product sourcing, improving management of the supply chain, upgrading the logistics, warehousing, stock control processes and accelerating the distribution routes to customers.  We also successfully rolled out a new enterprise resource planning (ERP) system although there were some major early implementation issues. However, these changes, together with a difficult restructuring of the European businesses resulted in substantial unplanned disruption which had a significant adverse impact on trading performance. The resulting underlying loss for the year of £5.7 million, though in line with the Board's revised expectations, was extremely disappointing. All of our recent attention has been focused on analysing the cause of this underperformance and on creating a new plan for the business to turnaround its fortunes.

Thorough review and new business plan

The Board has now completed a thorough review of the business' operations, including its brands, product lines, distribution channels and territories.  The review has identified that many core parts of the business are stable, profitable and cash generative, driven by iconic brands with strong market positions.  The review has also identified areas of the business that require fundamental change to deliver sustainable profit and cash generation.

The Board intends to refocus the business on existing profitable and cash generative products, channels and geographies. This is expected to result in a contraction of revenue as the number of products, brands and channels are reduced. The Board intends to reduce the cost base of the business to reflect projected revenue and a simplified overall business model.  The recent implementation of the ERP system is now complete and is expected to facilitate operational improvements through access to better quality management information.

The new business plan is intended to return the business to sustainable profitability and cash generation through the following key steps:

Reduce business scale and costs

The Group intends to focus on the most profitable and cash generative areas of the business and to make significant cost savings. As a result, it expects to reduce revenue by approximately a quarter.

Maintain key UK brands

All key UK brands will be retained.  The Group owns a number of highly recognisable and profitable brands (Hornby, Scalextric, Airfix, Humbrol and Corgi), which are core to the Group's future strategy. The Group sells products into both the Hobby Market and Toy Market. The new business plan will be strongly focused on improving service to core Hobby customers, especially through the Independent sales channel.

 

Streamline European operating model and brands

 

The Group intends to refocus its European business on its most profitable European model rail brands. This will allow the business to maintain a strong market position in international model rail. In addition, operations and product development will be centralised in the UK, resulting in a significant reduction in the cost base of the European business.  The Group intends to retain its US business given its historic profitability and future growth potential.

Focused product range

Over recent years the product range of the business has expanded significantly. The Board now intends to reduce the number of individual product lines by approximately 40 per cent. during the 2016 calendar year, focusing on products which generate higher gross margins. This will reduce business complexity and activity levels which will then allow the cost base to be reduced.  In the financial year ended 31 March 2016, approximately 50 per cent of the business' product lines contributed approximately 90 per cent. of the gross margin. Even after the planned reduction, the Group will be actively managing approximately 1,400 product lines in the 2017/18 financial year. The product range will be streamlined further in 2017, while continuing to release innovative new products to the market.

Refine channel strategy and exit concessions:

In the UK the Group intends to exit a majority of its concession arrangements as it looks to focus on profitable channels to market and improve its customer service.  The Board has been pleased with the growing profitability of its independent and internet distribution channels and in particular intends to support and build on the success of the independent channel. The Company's online sales increased by 39 per cent. compound annual growth rate between 2013 and 2015 and the Company is keen to improve upon this.

 

Careful management of stock

The failure to meet sales expectations in the 2015/16 financial year combined with the forthcoming rationalisation of the product range, exit of the concessions channel and contraction of the European business has resulted in a higher than necessary level of stock.  The plan is to reduce this in a staged and managed way during the coming year, which will result in cash generation and stock returning to more normal levels.

Implementation of the new business plan is expected to give rise to restructuring costs in the current financial year of approximately £1.7 million across the Group's UK and European operations.  Implementation of any changes to the business and product lines will be phased and structured to minimise disruption to the core business.

In the short term, after a period of transition in 2016, the Board expects the new business plan to result in a modest improvement in gross margin in 2017/18 (driven only by the improved mix effect of the product range rationalisation), with variable costs to reduce significantly.  Once implemented, the new business plan for 2017/18 is estimated to result in an approximately 33 per cent reduction in fixed costs.  Focusing on a reduced number of product lines is expected to reduce the Company's capital expenditure, with a consequent significant positive impact on its cash generation (EBITDA less capital expenditure).  In the medium term, the new business plan targets modest revenue growth, a stabilisation of gross margin and EBITDA improvement driven by operational gearing. Combined with a stable level of capital expenditure this is expected to result in improved cash generation.

 

Our brands

The start of the year saw James May proclaim the Corgi "Goldfinger DB5" his 'car of the century' and we celebrated this accolade by re-releasing the model for a new generation of customers. To complement this a dedicated "SPECTRE" DB10 and a DB5/DB10 twin-pack was issued alongside the Scalextric "SPECTRE" set, incorporating replicas of the iconic Aston Martin DB10 and Jaguar C-X75, linked to the launch of the latest James Bond film, which capitalised on the interest surrounding the new James Bond film.

 

Another highlight of the year was the significant public interest and press coverage of the Flying Scotsman's inaugural journey from Kings Cross to York in February, which helped drive sales of Hornby's "The Flying Scotsman" set. Notable Airfix releases during the year included the 1:72 scale Westland Sea King Helicopter and the Quickbuild range (aimed at children and requiring no paint or glue), which added 3 new Hypercars (the Bugatti Veyron, Lamborghini Aventador and McLaren P1) to its lineup.

 

In Europe, the year also saw strong sales of new lines across the Arnold, Jouef and Rivarossi brands.

 

Our people

The quality of our product and strength of our brands is due to the passion and commitment of Hornby's talented people. We have continued to attract talented people to the business and have a strong team in place. However, the changes demanded by the new business plan include significant cost reductions and these will inevitably impact people. We will deal with these challenges in a professional and sensitive manner and I am confident that we will be able to able to build a stronger and profitable company which will then be in a position to continue to provide high quality products and service to its customers.

 

Outlook for 16/17 and Current Trading

The outlook for the medium term is underpinned by the new equity and debt proposals that are announced today, which we trust will be approved by our shareholders on 8 July 2016. Without the successful conclusion of these funding plans, the new business plan will not be deliverable.

 

The remainder of the 2016/17 financial year will be a period of transition for the Company as we reshape and streamline the business to deliver the plans outlined above. The year will include the various impacts of refocusing the business including an initial period running with a cost base which is too high, the costs of restructuring and the financial impact of stock reduction, which is expected to result in cash generation and a reduction of stock to normal levels.

 

For the 10 weeks to 12 June 2016 the group delivered total year on year sales growth of 6%. This has been driven largely by the UK, underpinned by the stock reduction programme, and the US. The European businesses are trading broadly in line with last year. This level of performance is in line with our expectations and the new business plan. Group net debt as at 12 June 2016 was approximately £8.1 million.

 

At this early stage, the Board considers the transition to the new plan is progressing well. As a result, the Board is confident that the new business plan can be delivered successfully and that Hornby can return to being a profitable and cash generative business which will progress to delivering shareholder value in the medium term.

 

 

Steve Cooke

Chief Executive

22 June 2016

Operating and Financial Review of the Year

 

Financial Review

 

2016

2015

Revenue

£55.8m

£58.1m

Gross profit margin

39%

47%

Underlying (loss)/profit before tax*

£(5.7m)

£1.6m

Underlying (loss)/profit before tax margin*

(10.2%)

2.8%

Loss before tax

£(13.5m)

£(0.2m)

Reported loss before tax margin

(24.3%)

(0.3%)

Reported loss after tax

£(13.7m)

£(0.1m)

Underlying basic (loss)/earnings per share*

(13.02)p

3.38p

Basic loss per share

(27.87)p

(0.31)p

Net debt

£7.2m

£7.5m

* Stated before amortisation of intangibles (brands and customer lists), net unrealised foreign exchange movements on intercompany loans, and exceptional items.

                   

Performance

Consolidated revenue for the year ended 31 March 2016 was £55.8 million, a decrease of 4% compared to the previous year's £58.1 million. Full year gross profit margin was lower, as expected, at 39% (2015: 47%) as a result of the planned clearance of old stock especially within the European subsidiaries and due to a change in the mix towards lower margin racing sets. In addition, there was also a lack of new, high margin European train stock because of the supply chain problems during the year.

Underlying overheads increased year-on-year by 8% in line with an expected increase in volumes and also due to the increase in distribution costs following the disruption to trading during the year and planned duplication of operational running costs. The new warehouse at Hersden was fully operational during the first half of the year but the various international warehouse operations were also still running during the year. Foreign exchange gains on trading transactions in the year totalled £0.8 million compared to losses of £0.2 million in the previous year. Sales and marketing costs increased by £0.3 million due to increased spend on TV advertising and market research.

Pre-tax loss before net foreign exchange movements on intercompany loans, amortisation of intangible brands, restructuring costs, implementation of the new ERP system, refinancing costs, profit on disposal of property, impairment of tooling and impairment of goodwill (hereafter referred to as underlying (loss)/profit before taxation) was (£5.7) million (2015: profit of £1.6 million) (see reconciliation in note 1). Basic (loss) / earnings per share calculated on underlying (loss)/profit before taxation (hereafter referred to as underlying basic (loss)/earnings per share) were (13.02p) (2015: 3.38p).

A total of £7.9 million (2015: £1.8 million) of costs in these accounts have been identified as outside our definition of the measure of underlying profit as can be seen in note 1. These costs in the year included the net foreign exchange impact on intercompany loans (gain of £0.4 million), amortisation of intangibles (£0.4 million) and exceptional items totalling £7.9 million. Of this total £5.1 million (2015: £1.0 million) was the amortisation of intangible assets, the revaluation of intercompany loans, impairment of goodwill and impairment of tooling all of which are non-cash costs.

The exceptional items totalling £7.9 million (2015: £0.8 million) include restructuring costs (£1.0 million) relating to the reorganisation of the European management teams and the costs of running the Margate site, impairment of goodwill (£4.0 million) following the decision to restructure the European businesses, impairment of tooling (£1.1 million) following the decision to discontinue certain product lines as part of the new business plan outlined in the CEO report, costs relating to the implementation of the new ERP system (£1.2 million), costs relating to the 2015 equity issue and bank refinancing (£0.8 million) less the profit on the sale of part of the Margate site (£0.2 million).

Reported pre-tax loss was £13.5 million (2015: loss of £0.2 million) and reported basic loss per share was (27.87p) (2015: 0.31p loss per share). The income tax charge for the year £0.2 million (2015: £0.1 million credit) arises mainly due to prior year adjustments to deferred tax.

Segmental analysis

Third party sales by the UK business grew by 3% in the year and generated an underlying loss of £2.1 million compared to £1.6 million profit last year. Sales during the summer of 2015 were disrupted by the implementation of the new ERP system. Trading was then strong during the key Christmas season but weakened dramatically into the New Year. The International businesses sales fell by 21% in the year and generated an underlying loss of £3.6 million. Trading was severely impacted by problems with the supply of international model rail for much of the first half of the financial year and by the streamlining of supply and logistics.

 

Balance sheet

Group inventories increased during the year by 9% from £12.5 million to £13.6 million due to the overhang of stock from the overall sales shortfall against expectations during the year. Trade and other receivables increased by 26% due to some large sales orders being fulfilled just before year end, with a fall post the year end to £9.8 million at the end of April (2015: £8.2 million). Trade and other payables reduced by £1.7 million largely due to a year on year reduction of stock purchases in the first calendar quarter of 2016. The net effect of these factors was an increase in working capital requirements by £5.6 million (an increase of 41%). Investment in new tooling, new computer software and other capital expenditure was £4.6 million (2015: £5.1 million).

 

Capital structure

On 12 August 2015, Hornby's ordinary shares of 1 pence each were admitted to trading on AIM. The ordinary shares were removed from trading on the Main Market of London Stock Exchange plc and their listing on the Official List was cancelled. The placing, which was announced on 18 June 2015, raised net funds of £14.2 million.

 

The funds raised in 2015 have been utilised by the investment in new product tooling, the development of the new ERP system and disappointingly by the cash losses sustained during the year and by the increased working capital requirement.

 

There was a decrease in net debt at 31 March 2016 to £7.2 million, from £7.5 million at 31 March 2015.

 

Dividend

The challenges facing the business during the past 12 months have been significant and consequently trading has been impacted. Therefore, the decision has again been taken not to pay a dividend (2015: 0.0p). The Board continues to keep the dividend policy under review.

Banking facilities

At 31 March 2016 the Group had in place a revolving credit facility of £10 million expiring August 2019.

 

The Group has today announced a proposed placing and open offer of £8 million. Subject to completion of the proposed equity fundraising, the company has agreed with its main lender, Barclays Bank Plc, to refinance and extend its existing banking facilities with a £10 million revolving credit facility. The new facility will mature on 31 December 2019 and is expected to allow sufficient headroom for trading working capital and capital expenditure needs through to such date. The new facility has a margin of 3.5% over LIBOR and is subject to commitment and utilisation fees dependent on the level of drawings under the facility.

 

As is customary the facility is subject to financial covenants, which the Group must comply with and which are to be tested quarterly. For the duration of the transition period of the Group's new business plan through to December 2017, such financial covenants shall comprise a minimum EBITDA test and a current asset (stock and receivables) to net debt test.  Thereafter, the financial covenants shall revert to customary leverage and interest cover financial covenants.

 

Borrowings in the yearended 31 March 2016 peaked towards the start of the year under the previous bank facility at £12.9 million. Since August 2015 the Company has operated within its new facility limit of £10 million.

 

Property Update

During the year part of the former head office and warehouse site was sold for a consideration of £0.4 million. We are currently in discussions with a potential purchaser regarding the sale of the remainder of the Margate site. The Hornby Visitor Centre remains located on the main part of the site and will require relocation.

 

In addition, post the year-end, we completed the sale of office premises in Spain for of consideration of €1.3 million.

 

Going Concern

The Group's turnaround plan requires additional investment, so the Group are proposing to raise £8 million of additional equity to enable Management to pursue this plan.

 

The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group's bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016.

 

The Group has prepared cash flow forecasts on the basis of the additional equity raise and new facility and after detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

However, as the current fundraise has not yet been approved by shareholders prior to approval of these financial statements there remains a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

 

OUR KEY PERFORMANCE INDICATORS ('KPIs')

The Directors are of the opinion that the financial KPIs are revenues, gross margins, underlying (loss)/profit before tax, (loss)/earnings per share and cash generation, the information for which is available in these financial statements and summarised on the financial highlights section earlier in this report. In light of the work currently being undertaken on the new business plan, management will put in place additional KPIs to monitor progress on the key elements of the plan, which are considered fundamental to performance during the transition period. The Board monitors progress against plan on a regular basis adjusting future objectives annually in line with current circumstances.

IDENTIFICATION OF PRINCIPAL RISKS AND UNCERTAINTIES

The Board has the primary responsibility for identifying the major risks facing the Group and developing appropriate policies to manage those risks. The Board completes an annual risk assessment programme in order to identify the major risks and has reviewed and determined any mitigating actions required as set out below. The risk assessment has been completed in the context of the overall strategic objectives and the new business plan of the Group which has been set out on pages 4 to 6.

Principal risks and uncertainties

Risk

Description

Impact/Sensitivity

Mitigation/Comment

Market conditions

The Group's products are sold in the main to its retail customers. The performance of the market is affected by the general economic climate, overall consumer and retailer confidence, and the changing retail landscape.

The Group performance is impacted by the global macro-economic environment and changes in the wider retail landscape.

In reviewing the future forecasts for the business the Directors consider reasonable changes in macro-economic and associated market conditions recognising the potential for a negative impact on the Group's results and ensure that resources are flexed to maximise the Group's objectives as a result.

New business plan

New business plan may not fully achieve the aims outlined in the CEO report.

The reduction in business scale and costs, the reduction of the product lines, the requisite level of stock reduction, headcount reductions and/or the conversion of concession sales currently anticipated is not achieved and the Group does not achieve sustainable profit and cash generation.

The Group has developed clear targets and has contingencies in the plan to put the necessary resources in place to deliver the aims of the plan.

Distribution channels

The retail landscape is changing with the Group's traditional high street independent distribution network under significant commercial pressure from online retailers and discounters.

High street failures will reduce traditional customer base sales levels and increase credit risk.

The Group formulates its business strategy, including the website and direct to consumer channels, based on the changing retail dynamics. The Group will continue to strike a balance between selling direct through its website and through its independent and national customers, which remain important to its core markets.

Competing brands

The Group has competition in the model railway, slot racing, model kits, die cast and paint markets.

Loss of market share to increased competitor activity would have a negative impact on the Group's results.

In many of our markets the Group enjoys a strong market position due to the continued development of our brands. Brands are extremely important in the model sector with market entry costs being prohibitive.

Exchange rates

The Group purchases goods in US Dollars and sells in Pounds Sterling, Euros and US Dollars and is therefore exposed to exchange rate fluctuations.

Significant fluctuations in exchange rates to which the Group is exposed could have a material adverse effect on the Group's future results.

The Group continues to hedge short-term exposures by establishing forward currency purchases using fixed rate and participating forward contracts up to twelve months ahead. It is deemed impractical to hedge exchange rate movements beyond that period.

Supply chain

The Group purchases goods, in the main, from third party Chinese suppliers due to the significant cost advantage when compared to products manufactured in Europe.

The Group does not have exclusive arrangements with its suppliers and there is a risk that competition for manufacturing capacity could lead to delays in introducing new products or servicing existing demand.

 

Input cost escalation in China could reduce or remove the Group's pricing advantage and impact margins.

 

The Group is continuing to develop and diversify its supplier portfolio, which includes a supplier in India and more recently in the UK. Investment in product sourcing capability in Hong Kong in the last few years has led to an increase in the number of suppliers available to the Group in China. A 26 step critical path analysis tool has been developed to monitor the whole manufacturing process in order to identify and deal with issues as they arise.

 

The Group has its own facilities in China where its tooling is secured and managed.

Capital allocation

The Group now holds over 5,000 product lines across its own brand range.

Producing smaller quantities of more products puts pressure on gross margins and can lead to increased stock levels.

The new business plan will significantly reduce the number of product lines and refocus the business on profitable lines which generate higher gross margins. This process will be underpinned by a robust capital allocation process.

Product compliance

The Group's products are subject to compliance with toy safety legislation around the world.

Failure to comply could lead to a product recall resulting in damage to Company and brand reputation along with an adverse impact on the Group's results.

Robust internal processes and procedures, active monitoring of proposed legislation and involvement in policy debate and lobbying of the relevant authorities.

Liquidity

Insufficient financing to meet the needs of the business.

Without the appropriate level of financing it would be increasingly difficult to execute the Group's business plans.

The Group had a revolving credit facility of £10 million expiring December 2019. The Group's policy on liquidity risk is to maintain adequate facilities to meet the future needs of the business. This has recently been renegotiated on the back of the proposed equity raise and the Group now has a £10 million facility expiring in December 2019, conditional on the equity proposals being approved by shareholders.

System and cyber risk

The Group continues to invest in its e-commerce with the expansion and development of its website and has implemented a new ERP system during the year.

This exposes the business to greater risk of financial loss, disruption or damage to the reputation of an organisation from a failure of its information technology systems.

The Group has invested significant time and cost in the new website and ERP system in the last two years. The Group has dedicated web and ERP teams to monitor and maintain the Group's systems and holds appropriate insurance policies to minimise material risk.

 

Main control procedures

Management establishes control policies and procedures in response to each of the key risks identified. Control procedures operate to ensure the integrity of the Group's financial statements, and are designed to meet the Group's requirements and both financial and operational risks identified in each area of the business. Control procedures are documented where appropriate and reviewed by management and the Board on an ongoing basis to ensure control weaknesses are mitigated.

Ordinarily, the Group operates a comprehensive annual planning and budgeting system. The annual plans and budgets are approved by the Board. The Board reviews the management accounts at its monthly meetings and financial forecasts are updated monthly and quarterly. Performance against budget is monitored and where any significant deviations are identified appropriate action is taken. Given the recent challenges the Group has faced the budget for the current financial year has recently been finalised to reflect the targets in the new business plan.

 

 

David Mulligan

Group Finance Director

22 June 2016

 

Directors and Corporate Information

 

Directors             

S Cooke

Chief Executive

R Canham

Executive Chairman           

D Mulligan

Group Finance Director

D Adams

Non-Executive Director

C Caminada

Non-Executive Director

Company Secretary

A Stacey

 

Registered office

3rd Floor The Gateway

Innovation Way

Discovery Park

Sandwich

Kent CT13 9FF

 

Company Registered Number

Registered in England Number: 01547390

Independent Auditors

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

The Portland Building

25 High Street

Crawley

West Sussex RH10 1BG

Solicitors

Berwin Leighton Paisner LLP

Adelaide House

London Bridge

London EC4R 9HA

Principal Bankers

Barclays Bank PLC

9 St George's Street

Canterbury

Kent CT1 2JX

Financial Advisers and Brokers

Numis Securities Limited

The London Stock Exchange Building

10 Paternoster Square

London EC4M 7LT

Registrars and Transfer Agents

Capita Registrars Limited

The Registry

34 Beckenham Road

Beckenham

Kent BR3 4TU

 

Directors' Report

The Directors present their Annual Report together with the audited consolidated and Company financial statements for the year ended 31 March 2016.

The Group's business review along with future developments and the principal risks and uncertainties facing the Group are included in the Strategic review.

Principal activities

The Company is a holding company registered in England No. 01547390 with a Spanish branch and has six operating subsidiaries: Hornby Hobbies Limited in the United Kingdom with a branch in Hong Kong, Hornby America Inc. in the US, Hornby Espana S.A. in Spain, Hornby Italia s.r.l in Italy, Hornby France S.A.S in France and Hornby Deutschland GmbH in Germany. Hornby Plc is a public limited company which is listed on the Alternative Investment Market ("AIM"), and incorporated and operating in the United Kingdom. Its registered office is set out on page 12.

The Group is principally engaged in the development, design, sourcing and distribution of hobby and interactive products.

Results and dividends

The results for the year ended 31 March 2016 are set out in the Group Statement of Comprehensive Income on page 21. Revenue for the year was £55.8 million compared to £58.1 million last year. The loss for the year attributable to equity holders amounted to £13.7 million (2015: £0.1 million loss). The position of the Group and Company is set out in the Group and Company Balance Sheets on page 22. Future developments are set out within the CEO report within the outlook paragraph on page 6.

No interim dividend was declared in the year (2015: £nil) and the Directors do not recommend a final dividend (2015: £nil).

Going Concern

The Group's turnaround plan requires additional investment, so the Group are proposing to raise £8 million additional equity to enable Management to pursue this plan.

 

The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group's bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016.

 

The Group has prepared three-year cash flow forecasts on the basis of the additional equity raise and new facility and after detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

However, as the current fundraise has not yet been approved by shareholders there remains a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

 

Research and development

The Board considers that research and development into products continues to play an important role in the Group's success. All R&D costs incurred in the year have been charged to the Statement of Comprehensive Income and are set out in note 4, these costs all relate to research costs.

Directors

The persons who were Directors during the year and up to the date of signing the financial statements are listed below:

Steve Cooke, aged 50, joined the Board on 13 July 2015 as Finance Director and on 26 April 2016 was appointed Chief Executive. Steve has significant financial and general management experience in both PLC and private environments. Previously, he was Finance Director at LSL Property Services PLC, COO at Bestinvest, CFO at Mapeley and CFO at Energis, where he was part of the successful turnaround team. Having qualified with Coopers & Lybrand Steve was a strategy consultant with OC&C before spending time in senior financial and general management roles at Sainsbury's, Homebase and B&Q.

David Mulligan, aged 46, was appointed to the board on 25 May 2016. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc.  Most recently he was Municipal FD at Shanks Group plc.  Prior to this he worked at Smiths Group plc and trained as a chartered accountant at Ernst & Young.

Roger Canham, aged 50, was appointed to the Board on 7 November 2012 and became Chairman on 1 February 2013. Roger has been Chairman of Phoenix Asset Management Partners Limited ('Phoenix') since 2009 and also owns and manages a number of property development companies. Prior to that, he was a Non-Executive Director of Goshawk Insurance Holdings PLC from 2007 until the business was acquired in 2008, and a Director of Brake Bros Limited, for a year following its acquisition of W. Pauley & Co Limited in 2002. Mr Canham joined W. Pauley & Co Limited in 1990 and became Managing Director in 1996.

David Adams, aged 61, was appointed a Non-executive Director on 9 January 2014. David is currently senior Non-Executive Director of Halfords plc and chairs Conviviality Retail plc, Ecovision Ltd, Park Cameras Ltd, and Walk the walk (a breast cancer charity). In addition, he is a Non-Executive Director of Fever-Tree Drinks plc. David chairs the audit committee at Halfords and Fever-Tree Drinks. Prior to that he was Executive Chairman of Jessops and Chief Financial officer and Deputy Chief Executive officer at House of Fraser plc.

Charlie Caminada, aged 57, was appointed a Non-Executive Director on 9 January 2014. Charlie was previously Chief Operating Officer of HIT Entertainment Plc, which is now part of Mattel. His most recent position was the Founder and Chief Operating Officer of Ludorum, a media investment company that focused on managing IP franchises for children's entertainment brands, including Chuggington. Charlie led the company's IPO on AIM in 2006. He is a Non-Executive Director of Shoe Zone Plc and chairs the Remuneration Committee at the Company.

Richard Ames, aged 44, was appointed to the Board on 28 April 2014. Richard resigned on 12 February 2016.

Nick Stone, aged 51, joined the Group on 14 January 2013 and was appointed Group Finance Director on 1 February 2013. Nick Stone left Hornby in October 2015 and was replaced by Steve Cooke who joined the business on 10 June 2015.

The interests of the Directors in the shares of the Company and in options granted over such shares are disclosed later in this Report.

Directors' indemnities

The Company maintained liability insurance for its Directors and officers during the financial year and up to the date of approval of the Annual Report and Accounts. The Company has also provided an indemnity for its Directors and the secretary, which is a qualifying third party indemnity provision for the purposes of the Companies Act 2006.

 

 

Substantial shareholdings

The Company has been notified that at close of business on 17 June 2016 the following parties were interested in 3% or more of the Company's ordinary share capital.

Shareholder

Number of ordinary shares

Percentage held

Phoenix Asset Management Partners Limited

16,257,323

29.58

New Pistoia Income Limited

12,129,000

22.07

Ruffer LLP

7,022,583

12.78

Downing LLP

3,156,437

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the Annual Report and accounts in accordance with applicable law and regulations.

 

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the Company and Group for that period.  In preparing these financial statements, the directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements and accounting estimates that are reasonable and prudent

·      state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements;

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company and the group will continue in business.

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Disclosure of information to auditors

In the case of each director in office at the date the directors' report is approved, that:

 

(a) so far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and

 

(b) he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information.

 

Financial instruments

The Group's financial instruments, other than derivatives, comprise borrowings, cash and liquid resources, and various items, such as trade receivables, trade payables, etc. that arise directly from its operations. The Group's financial liabilities comprise borrowings, trade payables, other payables and finance leases. The main purpose of the Group's borrowings is to raise finance for the Group's operations. The Group also has financial assets comprising cash and trade and other receivables.

The Group also enters into derivatives transactions (principally forward foreign currency contracts). The purpose of such transactions is to manage the currency risks arising from the Group's operations. It is, and has been throughout the period under review, the Group's policy that no speculative trading in financial instruments shall be undertaken.

FINANCIAL RISK MANAGEMENT

The financial risk is managed by the Group and more information on this can be found within the Notes to the financial statements on page 30.

Personnel policies

It is the policy of the Group to follow equal opportunity employment practices and these include the full consideration of employment prospects for the disabled.

Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. Arrangements are made, wherever possible, for retraining employees who become disabled, to enable them to perform work identified as appropriate to their aptitudes.

The Group places importance on the contributions to be made by all employees to the progress of the Group and aims to keep them informed by the use of formal and informal meetings. One of the Company's incentive schemes includes share scheme options for Directors and senior management, further detail of which is covered later in this Report.

Share capital

The share capital of the Company comprises ordinary shares of 1p each. Each share carries the right to one vote at general meetings of the Company. The issued share capital of the Company, together with movements in the Company's issued share capital is shown in note 21.

Independent auditors

A resolution to reappoint the auditors, PricewaterhouseCoopers LLP, will be proposed at the forthcoming Annual General Meeting.

Annual General Meeting

The Annual General Meeting is to be scheduled for Summer 2016. A notice of the Annual General Meeting will be sent out to shareholders separately to this Annual Report and Accounts. The notice of the Annual General Meeting is important and requires your immediate attention. If you are in any doubt as to what action to take in relation to the Annual General Meeting, you should consult appropriate independent advisers.

DIRECTORS' REMUNERATION

Executive Directors' base salaries are reviewed annually by the Committee taking into account the responsibilities, skills and experience of each individual, pay and employment conditions within the Company and salary levels within listed companies of a similar size.

 

The following table summarises the total salary and pension contributions received by Directors for 2015-16 and 2014-15 in line with the Companies Act 2006 requirement:

 

 

 

Year ended 31 March 2016

Year ended 31 March 2015

 

 

Basic salary and fees £'000

Pension contributions

 £'000

Total salary and pension contributions £'000

Basic salary and fees £'000

Pension contributions

 £'000

Total salary and pension contributions

 £'000

S Cooke (Joined 10 June 2015)

170

32

202

-

-

-

R Canham

100

-

100

150

-

150

D Adams

40

-

40

40

-

40

C Caminada

40

-

40

40

-

40

R Ames (Joined 28 April 2014, resigned 12 February 2016)

373*

53

426

287

56

343

N Stone (Resigned 10 June 2015)

148**

21

169

190

36

226

Total

871

106

977

707

92

799

                 

 

* - included within the basic salary and fees is compensation for loss of office totalling £96,000

** - included within the basic salary and fees is compensation for loss of office totalling £36,000

 

Performance Share Plan awards outstanding

At 31 March 2016, outstanding awards to Directors under the Performance Share Plan were as follows:

Director

Award date

Vesting date

Market

price at

Award date

At

1 April

2015

Awarded during year

Lapsed

during

 year

Vested

during

year

At

31 March 2016

S Cooke

Aug 2015

Aug 2018

105.0p

-

190,476

-

-

190,476

R Canham

July 2013

July 2016

81.5p

122,699

-

-

-

122,699

R Ames

Sept 2014

Sept 2017

71.0p

845,070

845,070

(845,070)

-

-

 

Aug 2015

Aug 2018

105.0p

-

292,857

(292,857)

-

-

N Stone

July 2013

July 2016

81.5p

220,859

-

(72,883)

-

147,976

 

Sept 2014

Sept 2017

71.0p

253,521

253,521

(253,521)

-

-

 

For the 2013 awards, 40% of an award is subject to a TSR condition and 60% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby's TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points.  For the EPS part of the award, 25% vests for average annual underlying EPS growth of RPI+3% p.a., with full vesting for average annual EPS growth of RPI+12% p.a. A sliding scale operates between these points

For the 2014 awards, 40% of an award is subject to a TSR condition and 60% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby's TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points. For the EPS part of the award, 25% vests for EPS of 5p for the year ending 31 March 2016, with full vesting for EPS of 12.2p for the year ending 31 March 2017 with a sliding scale operating between these points.

 

For the 2015 awards, 40% of an award is subject to a TSR condition and 60% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby's TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points.

 

Benefits and Pension

Policies concerning benefits, including the Group's company car policy, are reviewed periodically. Currently, benefits in kind comprise motor cars and private health cover, both of which are non-performance related. The Executive Directors and senior managers are members of defined contribution pension schemes and annual contributions are calculated by reference to base salaries, with neither annual bonuses nor awards under the share incentive schemes taken into account in calculating the amounts due. The contribution level continues to be 20% of base salary for Executive Directors.

Executive Directors' service contracts

The Executive Directors do not have fixed period contracts.

Payments to Past Directors, Policy on payment of loss of office and termination payments

No payments were made to past Directors in the year ended 31 March 2016. Notice periods are set under individual service contracts but the Company has a policy for Executive directors of a notice period of six months to be given by the Company which is extended to one year after six months' service and of six months to be given by the individual. The compensation for loss of office is based upon the respective service contracts and the components are based on the base salary of the director. IFRS 2 leaver provisions are applied to the PSP share scheme based upon the Directors' service contracts.

DIRECTORS' INTERESTS

Interests in shares

 

The interests of the Directors in the shares of the Company at 31 March 2016 were:

 

At

31 March 2016

number

At

31 March

2015

number

Executive Directors

 

 

S Cooke

-

-

Non-Executive Directors

 

 

R Canham

40,000

40,000

D Adams

10,000

-

C Caminada

32,325

22,325

 

All the interests detailed above are beneficial. Apart from the interests disclosed above no Directors were interested at any time in the year in the share capital of any other Group company. Roger Canham is also the chairman of Phoenix Asset Management Partners who hold a substantial shareholding in Hornby Plc.

 

On behalf of the Board

David Mulligan

Group Finance Director

3rd Floor The Gateway

Innovation Way

Discovery Park

Sandwich

Kent CT13 9FF

22 June 2016

 

Independent auditors' report to the members of Hornby Plc

Report on the financial statements

 

Our opinion

In our opinion, Hornby Plc's Group financial statements and Company financial statements (the "financial statements"):

·      give a true and fair view of the state of the Group's and of the Company's affairs as at 31 March 2016 and of the Group's and the Company's loss and cash flows for the year then ended;

·      have been properly prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union; and

·      have been prepared in accordance with the requirements of the Companies Act 2006.

 

Emphasis of matter - Group going concern

In forming our opinion on the Group financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1 to the financial statements concerning the Group's ability to continue as a going concern. The Group's new business plan requires additional investment. The directors plan to raise this through an equity raise of £8 million, subject to shareholder approval on 8 July 2016. In addition, a new bank facility was signed on 22 June 2016, conditional on this equity fundraising. Both the equity fund raise and the new bank facility are needed in order to finance the Group's operations and for it to continue as a going concern for at least the next 12 months. These conditions, in particular the requirement for shareholder approval of the equity fundraising, along with the other matters explained in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. The Group financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
 

What we have audited

The financial statements, included within the Annual Report and Accounts (the "Annual Report"), comprise:

·      the Group and Company Balance Sheet as at 31 March 2016;

·      the Group and Company Statement of Comprehensive Income for the year then ended;

·      the Group and Company Cash Flow Statement for the year then ended;

·      the Group and Company Statement of Changes in Equity for the year then ended; and

·      the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law.

In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events.

 

Opinion on other matter prescribed by the Companies Act 2006

In our opinion, the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements

Other matters on which we are required to report by exception

Adequacy of accounting records and information and explanations received

Under the Companies Act 2006 we are required to report to you if, in our opinion:

·      we have not received all the information and explanations we require for our audit; or

·      adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or

·      the Company financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Directors' remuneration

Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors' remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the directors

As explained more fully in the Statement of Directors' Responsibilities on page 15, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)"). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, 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.

What an audit of financial statements involves

We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

·      whether the accounting policies are appropriate to the Group's and the Company's circumstances and have been consistently applied and adequately disclosed;

·      the reasonableness of significant accounting estimates made by the directors; and

·      the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Rosemary Shapland (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Gatwick

22 June 2016

Group and Company Statements of Comprehensive Income

for the Year Ended 31 March 2016

 

 

Group

Company

 

Note

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Revenue

2

55,757

58,135

1,453

1,346

Cost of sales

 

(33,992)

(30,961)

-

-

Gross profit

 

21,765

27,174

1,453

1,346

Distribution costs

 

(8,441)

(5,937)

-

-

Selling and marketing costs

 

(12,472)

(12,246)

-

-

Administrative expenses

 

(9,652)

(7,367)

(969)

(888)

Other operating expenses

 

(4,324)

(1,303)

(9,494)

(103)

Operating (loss)/profit

2

(13,124)

321

(9,010)

355

Finance income

3

21

1

174

174

Finance costs

3

(429)

(506)

(181)

(192)

(Loss)/profit before taxation

4

(13,532)

(184)

(9,017)

337

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

Underlying (loss)/profit before taxation

2

(5,683)

1,622

494

337

Net foreign exchange impact on intercompany loans

 

389

(618)

-

-

Amortisation of intangible assets - brand names and customer lists

 

(384)

(377)

-

-

Exceptional items

4

(7,854)

(811)

(9,511)

-

(Loss)/profit before taxation

 

(13,532)

(184)

(9,017)

337

 

 

 

 

 

 

Income tax (charge)/credit

5

(182)

64

(68)

(51)

(Loss)/profit for the year after taxation

 

(13,714)

(120)

(9,085)

286

Other comprehensive income

 

 

 

 

 

Items that may be subsequently reclassified to profit or loss:

 

 

 

 

 

Cash flow hedges, net of tax

 

20

802

-

-

Currency translation differences

 

(127)

(501)

(401)

605

 

 

 

 

 

 

Other comprehensive (expense)/income for the year, net of tax

 

(107)

301

(401)

605

Total comprehensive (loss)/income for the year

 

(13,821)

181

(9,486)

891

Loss per ordinary share

 

 

 

 

 

Basic

7

(27.87)p

(0.31)p

 

 

Diluted

7

(27.87)p

(0.31)p

 

 

All results relate to continuing operations.

The notes on pages 25 to 54 form part of these accounts.

 

 

 

Group and Company Balance Sheets as at 31 March 2016

 

 

Group

Company

 

Note

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Assets

 

 

 

 

 

Non-current assets

 

 

 

 

 

Goodwill

8

4,516

8,464

-

-

Intangible assets

9

4,777

4,071

-

-

Property, plant and equipment

10

7,192

10,260

-

1,207

Investments

11

-

-

28,398

37,326

Deferred tax assets

20

1,991

2,099

-

-

 

 

18,476

24,894

28,398

38,533

Current assets

 

 

 

 

 

Inventories

12

13,637

12,469

-

-

Trade and other receivables

13

13,192

10,444

15,329

983

Derivative financial instruments

19

394

519

-

-

Current tax assets

17

213

419

-

81

Cash and cash equivalents

14

677

451

1

1

Property, plant and equipment held for sale

10

1,462

-

1,069

-

 

 

29,575

24,302

16,399

1,065

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Borrowings

18

(7,883)

(7,747)

-

(116)

Trade and other payables

15

(7,363)

(9,067)

(94)

(19)

Derivative financial instruments

19

(12)

(24)

-

-

Provisions

16

(446)

(255)

-

-

Current tax liabilities

17

-

(53)

(39)

-

 

 

(15,704)

(17,146)

(133)

(135)

Net current assets

 

13,871

7,156

16,266

930

Non-current liabilities

 

 

 

 

 

Borrowings

18

-

(163)

(4,902)

(4,395)

Deferred tax liabilities

20

(211)

(131)

(100)

(121)

 

 

(211)

(294)

(5,002)

(4,516)

Net assets

 

32,136

31,756

39,662

34,947

Equity attributable to owners of the parent

 

 

 

 

 

Share capital

21

550

392

550

392

Share premium

 

20,205

6,180

20,205

6,180

Capital redemption reserve

 

55

55

55

55

Translation reserve

 

(1,386)

(1,259)

(754)

(353)

Hedging reserve

 

382

362

-

-

Other reserves

 

1,688

1,688

19,145

19,145

Retained earnings

 

10,642

24,338

461

9,528

Total equity

 

32,136

31,756

39,662

34,947

 

The notes on page 25 to 54 form part of these accounts. The financial statements on pages 21 to 54 were approved by the Board of Directors on 22 June and were signed on its behalf by:

D Mulligan, Director, Registered Company Number: 01547390

Group and Company Statements of Changes in Equity

For the Year Ended 31 March 2016

GROUP

Share

capital

£'000

Share

premium £'000

Capital redemption reserve

£'000

Translation reserve

£'000

Hedging reserve

£'000

Other

reserves £'000

Retained earnings £'000

Total

equity

£'000

Balance at 1 April 2014

392

6,180

55

(758)

(440)

1,688

24,253

31,370

Loss for the year

-

-

-

-

-

-

(120)

(120)

Other comprehensive (expense)/income for the year

-

-

-

(501)

802

-

-

301

Total comprehensive income for the year

-

-

-

(501)

802

-

(120)

181

Transactions with owners

 

 

 

 

 

 

 

 

Share-based payments (note 22)

-

-

-

-

-

-

205

205

Total transactions with owners

-

-

-

-

-

-

205

205

Balance at 31 March 2015 and 1 April 2015

392

6,180

55

(1,259)

362

1,688

24,338

31,756

Loss for the year

-

-

-

-

-

-

(13,714)

(13,714)

Other comprehensive (expense)/ income for the year

-

-

-

(127)

20

-

-

(107)

Total comprehensive (loss)/income for the year

-

-

-

(127)

20

-

(13,714)

(13,821)

Transactions with owners

 

 

 

 

 

 

 

 

Net proceeds from issue of ordinary shares

158

14,025

-

-

-

-

-

14,183

Share-based payments (note 22)

-

-

-

-

-

-

18

18

Total transactions with owners

158

14,025

-

-

-

-

18

14,201

Balance at 31 March 2016

550

20,205

55

(1,386)

382

1,688

10,642

32,136

Retained earnings includes £553,000 at 31 March 2016 (2015: £570,000) which is not distributable and relates to a 1986 revaluation of land and buildings. Other reserves of £1,688,000 represent historic negative goodwill arising prior to the transition to IFRS.

 

COMPANY

Share

capital

£'000

Share

premium £'000

Capital redemption reserve

£'000

Translation reserve

£'000

Other

reserves £'000

Retained earnings £'000

Total

equity

£'000

Balance at 1 April 2014

392

6,180

55

(958)

19,145

9,037

33,851

Profit for the year

-

-

-

-

-

286

286

Other comprehensive income for the year

-

-

-

605

-

-

605

Total comprehensive income for the year

-

-

-

605

-

286

891

Transactions with owners

 

 

 

 

 

 

 

Share-based payments

-

-

-

-

-

205

205

Total transactions with owners

-

-

-

-

-

205

205

Balance at 31 March 2015 and 1 April 2015

392

6,180

55

(353)

19,145

9,528

34,947

Loss for the year

-

-

-

-

-

(9,085)

(9,085)

Other comprehensive expense for the year

-

-

-

(401)

-

-

(401)

Total comprehensive loss for the year

-

-

-

(401)

-

(9,085)

(9,486)

Transactions with owners

 

 

 

 

 

 

 

Net proceeds from issue of ordinary shares

158

14,025

-

-

-

-

14,183

Share-based payments

-

-

-

-

-

18

18

Total transactions with owners

158

14,025

-

-

-

18

14,201

Balance at 31 March 2016

550

20,205

55

(754)

19,145

461

39,662

The notes on page 25 to 54 form part of these accounts.
 

Group and Company Cash Flow Statement

for the Year Ended 31 March 2016

 

 

Group

Company

 

Note

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Cash flows from operating activities

 

 

 

 

 

Cash (used in)/generated from operations

27

(9,632)

5,328

294

(194)

Interest paid

 

(429)

(506)

(181)

(192)

Tax received/(paid)

 

204

(127)

31

67

Net cash (used in)/generated from operating activities

 

(9,857)

4,695

144

(319)

Cash flows from investing activities

 

 

 

 

 

Proceeds from sale of property, plant and equipment

 

349

20

342

-

Purchase of property, plant and equipment

10

(3,221)

(4,073)

-

-

Purchase of intangible assets

9

(1,341)

(988)

-

-

Interest received

 

21

1

174

174

Net cash (used in)/generated from investing activities

 

(4,192)

(5,040)

516

174

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of ordinary shares

 

15,000

-

15,000

-

Repayments of loans

 

(35)

(1,584)

-

-

Share issue and refinancing costs

 

(817)

-

(817)

-

Advances to subsidiary undertakings

 

-

-

(14,843)

116

Repayments to subsidiary undertakings

 

-

-

-

29

Net cash generated from/(used in) financing activities

 

14,148

(1,584)

(660)

145

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

99

(1,929)

-

-

Cash, cash equivalents and bank overdrafts at beginning of the year

 

(7,247)

(5,456)

1

1

Effect of exchange rate movements

 

119

138

-

-

Cash, cash equivalents and bank overdrafts at end of year

 

(7,029)

(7,247)

1

1

Cash, cash equivalents and bank overdrafts consist of:

 

 

 

 

 

Cash and cash equivalents

14

677

451

1

1

Bank overdrafts

18

(7,706)

(7,698)

-

-

Cash, cash equivalents and bank overdrafts at end of year

 

(7,029)

(7,247)

1

1

 

Notes to the Financial Statements

 

1. SIGNIFICANT ACCOUNTING POLICIES

Accounting policies for the year ended 31 March 2016

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

BASIS OF PREPARATION

The financial information for the year ended 31 March 2016 has been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU'), IFRS Interpretations Committee ('IFRS-IC') interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated Group and Parent Company financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities (including derivative instruments) at fair value through profit or loss. However, with regards to the Group, see below for details of material uncertainty.

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

GOING CONCERN

The Group's new business plan requires additional investment, so the Group is proposing to raise £8 million additional equity to enable Management to pursue this plan.

 

The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group's bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016.

 

The Group has prepared cash flow forecasts on the basis of the additional equity raise and new bank facility and following a detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, the Financial Statements continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

However, as the current fundraise has not yet been approved by shareholders prior to approval of these financial statements there remains a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

 

BASIS OF CONSOLIDATION

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset concerned. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

ADOPTION OF NEW AND REVISED STANDARDS

The Group applied all applicable new standards, interpretations and amendments published by the IASB and as endorsed by the European Union for the year beginning 1 January 2015, being IFRS 10, IFRS 11, IFRS 16, IAS 7, IAS 12 and amendments to IAS 1, IAS16, IAS19, IAS 27, IAS 28 and IAS 38. The implementation of these standards and amendments did not have a material effect on the accounts.

 

The Group did not early adopt any standard, interpretation, or amendments published by the IASB and endorsed by the European Union for which the mandatory application date is after 1 January 2014.

 

The following new standards, interpretations, and amendments to standards and interpretations have been issued, subject to the EU endorsement, but are not effective for the financial year beginning 1 January 2014 and have not yet been early adopted by the Group:

 

 

 

 

Effective date for periods beginning on or after

IFRS 9 "Financial Instruments"

1 January 2018

IFRS 15 "Revenue from Contracts with Customers"

1 January 2017

IFRS 16 "Leases"

1 January 2019

IAS 7 "Statement of cash flows"

1 January 2017

IAS 12 "Income tax"

1 January 2017

Amendments to IFRS 10 and IAS 28 "Sale or Contribution of Assets between an Investor and its Associate or Joint Venture"

1 January 2016

Amendments to IFRS 11 "Accounting for Acquisitions of interests in Joint Operations"

1 January 2016

Amendments to IAS 1 "Presentation of financial statements

1 January 2016

Amendments to IAS 16 and IAS 38 "Clarification of Acceptable Methods of Depreciation and Amortisation"

1 January 2016

Amendments to IAS 19 "Defined Benefit Plans: Employee Contributions"

1 July 2014

Amendments to IAS 27 "Equity Method in Separate Financial Statements"

1 January 2016

 

With the exception of IFRS 16 "Leases" the Group does not currently expect any of these changes to have a material impact on the results. IFRS 16 will replace the current guidance under IAS 17 and will have a significant impact on the accounting by lessees in particular. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 will require lessees to recognise a lease liability reflecting future lease payments and a 'right-of-use asset' for virtually all lease contracts. The adoption of IFRS 16 will have a material effect on the Hornby plc financial statements.

 

RECONCILIATION OF STATUTORY TO NON STATUTORY INFORMATION IN THE CHAIRMAN'S STATEMENT AND OPERATING AND FINANCIAL REVIEW

Underlying (loss)/profit before taxation is shown to present a clearer view of the trading performance of the business. Management has identified the following non-trivial adjustments, whose inclusion in earnings could distort underlying trading performance: net foreign exchange (gains)/losses on intercompany loans which are dependent on exchange rates from time to time and can be volatile and amortisation of intangibles which result from historical acquisitions. Additionally, exceptional items including restructuring costs and impairments to goodwill, add volatility and these are considered to be one-off items and therefore have also been added back in calculating underlying (loss)/profit before taxation.

 

Group

 

 

2016

£'000

2015

£'000

 

Loss before taxation

(13,532)

(184)

 

Net foreign exchange impact on intercompany loans

(389)

618

 

Amortisation of intangibles

384

377

 

Exceptional items:

 

 

 

Restructuring costs

993

811

 

Implementation of new ERP system

1,174

-

 

Refinancing costs

762

-

 

Profit on disposal of property

(223)

-

 

Impairment of property, plant and equipment - tooling

1,158

-

 

Impairment of goodwill

3,990

-

 

Underlying (loss)/profit before taxation

(5,683)

1,622

 

 

The Statement of Comprehensive Income discloses foreign exchange movements, amortisation of intangibles and exceptional items. Further detail of the exceptional items is included in Note 4.

 

REVENUE RECOGNITION

Revenue is measured at the fair value of the sale of goods net of value added tax, rebates and discounts, royalty income and after eliminating sales within the Group.

Revenue is recognised as follows:

(a) Sale of goods

              Sales of goods are recognised when a Group entity has delivered products to the customer. The customer is either a trade customer or the consumer when sold through Hornby concessions in various retail outlets, or via the internet.

(b) Royalty income

              Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements.

(c) Sales returns

              The Group establishes a sales returns provision at the period end that reduces revenue in anticipation of customer returns of goods sold in the period.

(d) Hornby Visitor Centre

                Revenue is generated from the ticket and product sales at our Visitor Centre in Margate and recognised at the point of sale.

 

 

Dividend income in the Company is recognised upon receipt. Management fees are recognised in the Company on an accruals basis in relation to costs incurred on behalf of subsidiary companies.

EXCEPTIONAL ITEMS

Where items of income and expense included in the statement of comprehensive income are considered to be material and exceptional in nature, separate disclosure of their nature and amount is provided in the financial statements. These items are classified as exceptional items. The Group considers the size and nature of an item both individually and when aggregated with similar items when considering whether it is material, for example impairment of intangible assets or restructuring costs.

OPERATING SEGMENTS

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 Board of the Company that makes strategic decisions.

Operating profit of each reporting segment includes revenue and expenses directly attributable to or able to be allocated on a reasonable basis. Segment assets and liabilities are those operating assets and liabilities directly attributable to or that can be allocated on a reasonable basis.

BUSINESS COMBINATIONS

Goodwill arising on a business combination before and after 1 April 2004, the date of transition to IFRS, is not subject to amortisation but tested for impairment on an annual basis. Intangible assets, excluding goodwill, arising on a business combination subsequent to 1 April 2004, are separately identified and valued, and subject to amortisation over their estimated economic lives.

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 is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose identified according to operating segment. Goodwill is recorded in the currency of the cash generating unit to which it is allocated.

INTANGIBLES

(a) Brand names

      Brand names, acquired as part of a business combination, 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 brand names over their estimated economic life of 15-20 years. Brand names have been valued on a 'relief from royalty' basis.

(b) Customer lists

      Customer lists, acquired as part of a business combination, 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 ten years. Customer lists have been valued according to discounted incremental operating profit expected to be generated from each of them over their useful lives.

(c) 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.

(d) Computer software

Computer software expenditure is capitalised at the value at the date of acquisition and depreciated over a useful economic life of 4-6 years.

 

PROPERTY, PLANT AND EQUIPMENT

Land and buildings are shown at cost less accumulated depreciation. Assets revalued prior to the transition to IFRS use this valuation as deemed cost at this date. Other property, plant and equipment are shown at historical cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use.

Depreciation is provided at rates calculated to write off the cost or valuation of each asset, on a straight-line basis (with the exception of tools and moulds) over its expected useful life to its residual value, as follows:

Freehold buildings                   - 30 to 50 years

Plant and equipment                - 5 to 10 years

Motor vehicles                         - 4 years

Freehold land is not depreciated.

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 four years.

 

 

IMPAIRMENT OF NON-CURRENT ASSETS

Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying value exceeds its recoverable amount, which is considered to be the higher of its value in use and fair value less costs to sell. In order to assess impairment, assets are grouped into the lowest levels for which there are separately identifiable cash flows (cash-generating units). Cash flows used to assess impairment are discounted using appropriate rates taking into account the cost of equity and any risks relevant to those assets.

INVESTMENTS

In the Company's financial statements, investments in subsidiary undertakings are stated at cost less any impairment. Investments revalued using the equity method of valuation prior to the transition to IFRS use this valuation as deemed cost at this date. Dividend income is shown separately in the Statement of Comprehensive Income.

INVENTORIES

Inventories are stated at the lower of cost and net realisable value. Cost is predominantly determined using the first-in, first-out ('FIFO') method. Alternative methods may be used when proven to generate no material difference. 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 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.

The replacement cost, based upon latest invoice prices before the balance sheet date, is considered to be higher than the balance sheet value of inventories at the year end due to price rises and exchange fluctuations. It is not considered practicable to provide an accurate estimate of the difference at the year end date.

ASSETS HELD FOR SALE

Individual, formerly non-current assets, which are expected to be sold within the next twelve months, are measured at the lower of their carrying amount at the time they are reclassified and selling price less further costs expected to be incurred to disposal.

 

FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are recognised in the Group and Company's balance sheet when the Group or Company becomes a party to the contractual provisions of the instrument.

FINANCIAL LIABILITIES AND EQUITY

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.

An equity instrument is any contract that evidences a residual interest in the assets of the Group and Company after deducting all of its liabilities. Equity instruments issued by the Group and Company are recorded at the proceeds received, net of direct issue costs.

BORROWING COSTS

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the Statement of Comprehensive Income over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs and subsequently amortised over the life of the facility. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates.

SALES RETURNS PROVISIONS

Provisions for sales returns are recognised when the Group has a constructive obligation as a result of a past event. Provisions for sales returns are measured at the present value of the expenditure expected to be required to settle the obligation.

TRADE RECEIVABLES

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is recognised in the Statement of Comprehensive Income.

TRADE PAYABLES

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

TAXATION INCLUDING DEFERRED TAX

Corporation tax, where payable, is provided on taxable profits at the current rate.

The taxation liabilities of certain Group undertakings are reduced wholly or in part by the surrender of losses by fellow Group undertakings.

Deferred 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 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 offset when there is a legally enforceable right to offset current tax assets against current tax liabilities, and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Deferred 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. Tax relating to items recognised directly in equity is recognised in equity and not in the Statement of Comprehensive Income.

CRITICAL JUDGEMENTS IN APPLYING THE ACCOUNTING POLICIES

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that may have an element of risk causing an adjustment to the carrying amounts of assets and liabilities within the next financial year include provisions for stock obsolescence, customer returns, doubtful debts, impairment reviews, fair values of share-based payments, fair values of derivatives and recoverability of deferred tax assets. All of the above are estimated with reference to historical data, expectation of future events and reviewed regularly.

Whenever there is a substantiated risk that an item of stock's sellable value may be lower than its actual stock value, a provision for the difference between the two values is made. Management review the stock holdings on a regular basis and consider where a provision for excess or obsolete stock should be made based on expected demand for the stock and its condition.

The provision for sales returns is based on historic returns data applied to sales for the current year and this provision is reviewed by management on an ongoing basis.

Specific debtors are provided for when there is significant doubt that a repayment of debt will be fulfilled considering specific knowledge of the customer and sales terms of the debt outstanding.

The critical areas of judgement applied within the impairment reviews conducted include the weighted average cost of capital used in discounting the cash flows of the cash generating units, the assessment of the initial growth rate used, the growth rate in perpetuity of the cash flows and the forecast operating profits of the cash generating units. The judgments used within this assessment are set out within note 8.

The critical areas of judgment used in the share based payment charge for the year include the assessment of the fair value of the option along with the expected volatility and option term. These are based on historical data where this is available and best estimates where historical data is not available. Further details in relation to share-based payments are given in note 22.

The deferred tax assets are assessed based on the current trading performance, expected future cash flows in the specific countries and the nature of the tax base.

The fair value of the financial derivatives is determined by the mark to market value at the year end date.

PROVISIONS

Liabilities and 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 liability or provision is presented in the Statement of Comprehensive Income net of any reimbursement but only if reimbursement is virtually certain and will be settled simultaneously.

 

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.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents for the purpose of the cash flow statement includes cash in hand, deposits at banks, other liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts or loans where there is no right of set off are shown within borrowings in current or non-current liabilities on the balance sheet as appropriate.

SHARE-BASED PAYMENT

Hornby Plc operates two share-based payment plans:

·   Share Option Scheme

·   Performance Share Plan

The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions.

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Company is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity.

Share Option Scheme

Fair value is measured by use of the Black-Scholes model. The expected life used in the models has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

 

 

Performance Share Plan

Awards are granted to Executive Directors in shares worth 100% of salary, with lower levels of grant for less senior executives.

The Performance Share Plan ('PSP') incorporates two three-year performance conditions:

·   Total Shareholder Return ('TSR')

·   Earnings per share ('EPS') growth targets

each applying to a separate 40%:60% of the award respectively and vesting on the third anniversary of grant as appropriate. The method applied in estimating the fair value of the 'PSP' awards is the Black-Scholes model,

The TSR fair value and the projected EPS award fair value are spread over the vesting period of the shares and recognised in the Statement of Comprehensive Income in the appropriate year.

EMPLOYEE BENEFIT 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 Statement of Comprehensive Income according to the year in which they are payable.

Further information on pension costs and the scheme arrangements is provided in note 24.

SHARE CAPITAL AND SHARE PREMIUM

Ordinary shares issued are shown as share capital at nominal value. The premium received on the sale of shares in excess of the nominal value is shown as share premium within total equity.

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 current and non-current payables. 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.

Leases classed as operating leases are expensed on a straight-line basis to the Statement of Comprehensive Income over the lease term.

FINANCIAL RISK MANAGEMENT

Financial risk factors

The Group's operations expose it to a variety of financial risks that include the effects of changes in foreign currency exchange rates, market interest rates, credit risk and its liquidity position. The Group has in place a risk management programme that seeks to limit adverse effects on the financial performance of the Group by using foreign currency financial instruments. In addition, other instruments are used to manage the Group's interest rate exposure.

(a)   Foreign exchange risk

      The Group is exposed to foreign exchange risks against Sterling primarily on transactions in US Dollars. It enters into forward currency contracts to hedge the cash flows of its product sourcing operation (i.e. it buys US Dollars forwards in exchange for Sterling) and looks forward six-twelve months on a rolling basis at forecasted purchase volumes. The policy framework requires hedging between 70% and 100% of anticipated import purchases that are denominated in US Dollars. The Company has granted Euro denominated intercompany loans to subsidiary companies that are translated to Sterling at statutory period ends thereby creating exchange gains or losses. The loans to the subsidiaries, Hornby Deutschland GmbH, Hornby Italia s.r.l and Hornby France S.A.S are classified as long-term loans and therefore the exchange gains and losses on consolidation are reclassified to the translation reserve in Other Comprehensive Income as per IAS 21. The loan to the branch in Spain is classified as a long-term loan however repayable on a shorter timescale than those of the other subsidiaries and therefore the exchange gains or losses are taken to Statement of Comprehensive Income.

(b)   Interest rate risk

      The Group finances its operations through a mixture of retained profits and bank borrowings. The Group borrows, principally in Sterling, at floating rates of interest to meet short-term funding requirements. At the year end the Group's borrowings comprised a revolving credit facility, bank overdrafts and a fixed-term loan agreement.

(c)   Credit risk

      The Group manages its credit risk through a combination of internal credit management policies and procedures and external credit insurance.

(d)   Liquidity risk

At 31 March 2016 the Group had a revolving credit facility of £10 million expiring in August 2019. Borrowings in the year ended 31 March 2016 peaked at £12.9 million under the Group's previous revolving credit facility of £13 million. The needs are determined by monitoring forecast and actual cash flows. The Group regularly monitors its performance against its banking covenants to ensure compliance.

 

The Group has recently been successful in renegotiating its main UK banking facilities for a further three-and-a-half years. The proposed £8 million equity placing has allowed us to reduce reliance on debt facilities and we have signed a new revolving credit facility of £10 million with our main UK bankers Barclays. This facility is conditional on the equity raising being approved by shareholders which is expected to allow sufficient headroom for trading working capital and capital expenditure needs through to December 2019.

 

DERIVATIVE FINANCIAL INSTRUMENTS

To manage exposure to foreign currency risk, the Group uses foreign currency forward contracts, also known as derivative financial instruments.

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)   Cash flow hedge

      The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in Other Comprehensive Income. The gain or loss relating to the ineffective portion is recognised immediately in the Statement of Comprehensive Income within operating expenses.

      Amounts accumulated in Other Comprehensive Income are recycled in the Statement of Comprehensive Income in the periods when the hedged item affects profit or loss (for instance when the forecast purchase that is hedged takes place). The gain or loss relating to the effective portion of forward foreign exchange contracts hedging import purchases is recognised in the Statement of Comprehensive Income within 'cost of sales'. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) the gains and losses previously deferred in the Other Comprehensive Income are transferred from Other Comprehensive Income and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in cost of goods sold in the case of inventory.

      When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in income when the forecast transaction is ultimately recognised in the Statement of Comprehensive Income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss is immediately transferred to the Statement of Comprehensive Income.

(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 at fair value through the Statement of Comprehensive Income, and changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognised immediately in the Statement of Comprehensive Income.

FAIR VALUE ESTIMATION

The fair values of short-term deposits, loans and overdrafts with a maturity of less than one year are assumed to approximate to their book values.

The fair values of the derivative financial instruments used for hedging purposes are disclosed in note 19.

FOREIGN CURRENCY

Transactions denominated in foreign currencies are recorded in the relevant functional currency at the exchange rates ruling at the date of the transaction. Foreign exchange gains and losses resulting from such transactions are recognised in the Statement of Comprehensive Income, except when deferred and disclosed in Other Comprehensive Income as qualifying cash flow hedges. 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 Statement of Comprehensive Income.

Foreign exchange gains/losses recognised in the Statement of Comprehensive Income relating to foreign currency loans and other foreign exchange adjustments are included within operating profit.

On consolidation, the Statement of Comprehensive Income and cash flows of foreign subsidiaries are translated into Sterling using average rates that existed during the accounting period. The balance sheets of foreign subsidiaries are translated into 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 Other Comprehensive Income.

DIVIDEND DISTRIBUTION

Final dividends are recorded in the Statement of Changes in Equity in the period in which they are approved by the Company's shareholders. Interim dividends are recorded in the period in which they are approved and paid.

2. SEGMENTAL REPORTING

Management has determined the operating segments based on the reports reviewed by the Board (chief operating decision-maker) that are used to make strategic decisions.

The Board considers the business from a geographic perspective. Geographically, management considers the performance in the UK, US, Spain, Italy and the rest of Europe.

Although the USA segment does not meet the quantitative thresholds required by IFRS 8, management has concluded that this segment should be reported, as it is closely monitored by the Board as it is outside Europe.

The Company is a holding company operating in the UK with its results given in the Company Statement of Comprehensive Income on page 21 and its assets and liabilities given in the Company Balance Sheet on page 22. Other Company information is provided in the other notes to the accounts.

 

 

Year ended 31 March 2016

 

UK

£'000

USA

 £'000

Spain

£'000

Italy

£'000

Rest of

Europe

£'000

Total Reportable Segments £'000

Intra

Group

£'000

Group

£'000

Revenue             - External

42,562

3,080

2,470

2,275

5,370

55,757

-

55,757

                            - Other segments

6,534

-

2,250

696

822

10,302

(10,302)

-

Operating loss

(3,801)

(4)

(7,214)

(528)

(1,577)

(13,124)

-

(13,124)

Finance cost       - External

(379)

-

(38)

(3)

(9)

(429)

-

(429)

                            - Other segments

(175)

-

(181)

(130)

(56)

(542)

542

-

Finance income   - External

21

-

-

-

-

21

-

21

                            - Other segments

542

-

-

-

-

542

(542)

-

Loss before taxation

(3,792)

(4)

(7,433)

(661)

(1,642)

(13,532)

-

(13,532)

 

 

 

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

 

 

 

Underlying loss before taxation

(2,100)

(4)

(2,017)

(471)

(1,091)

(5,683)

-

(5,683)

Net foreign exchange impact on intercompany loans

389

 

-

 

-

 

-

 

-

 

389

 

-

389

Amortisation of intangibles

(264)

-

-

(71)

(49)

(384)

-

(384)

Restructuring costs

(332)

-

(312)

(15)

(334)

(993)

-

(993)

Implementation of new ERP system

(814)

-

(88)

(104)

(168)

(1,174)

-

(1,174)

Refinancing costs

(762)

-

-

-

-

(762)

-

(762)

Profit on disposal of property

223

-

-

-

-

223

-

223

Impairment of tooling

(132)

-

(1,026)

_

-

(1,158)

-

(1,158)

Impairment of goodwill

-

-

(3,990)

_

-

(3,990)

-

(3,990)

Loss before taxation

(3,792)

(4)

(7,433)

(661)

(1,642)

(13,532)

-

(13,532)

Taxation

(182)

-

-

-

-

(182)

-

(182)

Loss for the year

(3,974)

(4)

(7,433)

(661)

(1,642)

(13,714)

-

(13,714)

Segment assets

55,604

1,704

5,088

3,673

3,696

69,765

(23,918)

45,847

Less intercompany receivables

(20,918)

(53)

(720)

(1,051)

(1,176)

(23,918)

23,918

-

Add tax assets

1,752

-

-

157

295

2,204

-

2,204

Total assets

36,438

1,651

      4,368

2,779

2,815

48,051

-

48,051

Segment liabilities

14,036

1,923

11,141

4,414

5,799

37,313

(21,609)

15,704

Less intercompany payables

-

(1,774)

(10,635)

(4,026)

(5,174)

(21,609)

21,609

-

Add tax liabilities

207

-

4

-

-

211

-

211

Total liabilities

14,243

149

510

388

625

15,915

-

15,915

Other segment items

 

 

 

 

 

 

 

 

Capital expenditure

3,393

13

1,113

39

4

4,562

_

4,562

Depreciation

2,447

21

1,059

162

16

3,705

-

3,705

Net foreign exchange on intercompany loans

389

 

-

 

-

 

-

 

-

 

389

 

-

389

Amortisation of intangible assets

603

-

-

71

49

723

-

723

Impairment of goodwill

-

-

3,990

-

-

3,990

-

3,990

Share-based payment

18

-

-

-

-

18

-

18

 

All transactions between Group companies are on normal commercial terms.

 

Year ended 31 March 2015

 

UK

£'000

USA

 £'000

Spain

£'000

Italy

£'000

Rest of

Europe

£'000

Total Reportable Segments £'000

Intra

Group

£'000

Group

£'000

Revenue             - External

41,477

3,349

2,836

4,079

6,394

58,135

-

58,135

                            - Other segments

3,028

-

6,093

200

-

9,321

(9,321)

-

Operating profit/(loss)

46

125

111

315

(276)

321

-

321

Finance cost       - External

(406)

-

(72)

(12)

(16)

(506)

-

(506)

                            - Other segments

-

-

(193)

(137)

(64)

(394)

394

-

Finance income   - External

1

-

-

-

-

1

-

1

                            - Other segments

394

-

-

-

-

394

(394)

-

(Loss)/profit before taxation

35

125

(154)

166

(356)

(184)

-

(184)

 

 

 

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

 

 

 

Underlying profit/(loss) before taxation

1,566

125

(154)

265

(180)

1,622

-

1,622

Net foreign exchange impact on intercompany loans

(618)

 

-

 

-

 

-

 

-

 

(618)

 

-

(618)

Amortisation of intangibles

(264)

-

-

(83)

(30)

(377)

-

(377)

Restructuring costs

(649)

-

-

(16)

(146)

(811)

-

(811)

(Loss)/profit before taxation

35

125

(154)

166

(356)

(184)

-

(184)

 

 

 

 

 

 

 

 

 

Taxation

262

(39)

(92)

(170)

103

64

-

64

(Loss)/profit for the year

297

86

(246)

(4)

(253)

(120)

-

(120)

Segment assets

41,095

1,538

10,431

4,514

3,517

61,095

(14,417)

46,678

Less intercompany receivables

(13,198)

(4)

(915)

(238)

(62)

(14,417)

14,417

-

Add tax assets

2,092

-

31

139

256

2,518

-

2,518

Total assets

29,989

1,534

9,547

4,415

3,711

49,196

-

49,196

Segment liabilities

22,955

1,525

9,133

4,526

3,967

42,106

(24,850)

17,256

Less intercompany payables

(10,524)

(1,391)

(6,446)

(3,303)

(3,186)

(24,850)

24,850

-

Add tax liabilities

122

41

4

17

-

184

-

184

Total liabilities

12,553

175

2,691

1,240

781

17,440

-

17,440

Other segment items

 

 

 

 

 

 

 

 

Capital expenditure

3,563

19

1,243

234

2

5,061

-

5,061

Depreciation

2,550

22

1,020

141

16

3,749

-

3,749

Net foreign exchange on intercompany loans

618

 

-

 

-

 

-

 

-

 

-

 

-

618

Amortisation of intangible assets

264

-

-

83

30

-

-

377

Impairment of goodwill

-

-

-

-

-

-

-

-

Share-based payment

205

-

-

-

-

-

-

205

 

All transactions between Group companies are on normal commercial terms.

 

 

3. FINANCE COSTS

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Finance costs:

 

 

 

 

Interest expense on bank borrowings

(429)

(506)

-

-

Interest expense on intercompany borrowings

-

-

(181)

(192)

 

(429)

(506)

(181)

(192)

Finance income:

 

 

 

 

Bank interest

21

1

-

-

Interest income on intercompany loans

-

-

174

174

 

21

1

174

174

Net finance costs

(408)

(505)

(7)

(18)

 

4. (LOSS)/PROFIT BEFORE TAXATION

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

The following items have been included in arriving at (loss)/profit before taxation:

 

 

 

 

Staff costs (note 23)

11,010

10,210

1,147

1,160

Inventories:

 

 

 

 

- Cost of inventories recognised as an expense (included in cost of sales)

26,808

25,400

-

-

- Stock provision

(895)

(179)

-

-

Depreciation of property, plant and equipment:

 

 

 

-

- Owned assets

3,705

3,749

19

34

Profit/(loss) on disposal of fixed assets

193

(5)

223

-

Other operating lease rentals payable:

 

 

 

 

- Plant and machinery

125

142

-

-

- Property

1,058

446

-

-

Repairs and maintenance expenditure on property, plant and equipment

171

82

-

-

Research and development expenditure

1,760

1,810

-

-

Foreign exchange (gains)/losses:

 

 

 

 

- On trading transactions and ineffective hedges

(135)

135

-

-

Impairment of trade receivables

163

40

-

-

Share-based payment charge

18

205

(48)

103

Other operating expenses:

 

 

 

 

- Foreign exchange on trading transactions

(822)

205

-

-

- Net impact of foreign exchange on intercompany loans

(389)

618

-

-

- Movement on fair value of ineffective hedge

135

(102)

-

-

- Amortisation of intangible assets - brands

384

377

-

-

 

 

 

 

 

 

 

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

 

Exceptional items comprise:

 

 

 

 

- Restructuring costs

993

811

-

-

- Implementation of ERP system

1,174

-

-

-

- Refinancing

762

-

191

-

- Profit on disposal of property

(223)

-

(223)

-

- Impairment of property, plant and equipment

1,158

-

-

-

- Impairment of goodwill

3,990

-

-

-

- Impairment of investment

-

-

9,543

-

 

7,854

811

9,511

-

 

The exceptional items totalling £7.9 million (2015: £0.8 million) include restructuring costs (£1.0 million) relating to the reorganisation of the European management teams and the costs of running the Margate site, impairment of goodwill (£4.0 million) following the decision to restructure the European businesses, impairment of tooling (£1.1 million) following the decision to discontinue certain product lines as part of the new business plan, costs relating to the implementation of the new ERP system (£1.2 million), costs relating to the 2015 equity issue and bank refinancing (£0.8 million) less the profit on the sale of part of the Margate site (£0.2 million).

Services provided by the Company's auditors and network firms

During the year the Group (including its overseas subsidiaries) obtained the following services from the Company's auditors and network firms as detailed below:

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Fees payable to the Company's auditors for the audit of Parent Company and consolidated accounts

103

99

15

15

Fees payable to the Company's auditors and its associates for other services:

 

 

 

 

- The auditing of accounts of the Company's subsidiaries

39

37

39

-

- Audit-related assurance services

5

25

-

25

- Tax advisory services

19

31

-

-

- Tax compliance services

1

28

-

5

- Other advisory work

-

34

-

-

 

167

254

54

45

 

In the current financial year the level of non-audit fees was within the 1:1 ratio to audit fees as per Audit Committee policy.

 

 

5. TAXATION

Analysis of tax charge/(credit) in the year

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Current tax

 

 

 

 

- UK taxation

-

(7)

89

99

adjustments in respect of prior years

(43)

103

-

-

- overseas taxation

(8)

138

-

(43)

adjustments in respect of prior years

-

-

-

-

 

(51)

234

89

56

Deferred tax (note 20)

 

 

 

 

- current year

(569)

(216)

(3)

(2)

- overseas taxation

348

60

-

-

- adjustments in respect of prior years

255

(142)

(7)

(3)

- effect of tax rate change on opening balance

199

-

(11)

-

 

233

(298)

(21)

(5)

 

 

 

 

 

Total tax charge/(credit) to the loss before tax

182

(64)

68

51

 

The tax for the year differs to the standard rate of corporation tax in the UK of 20%. Any differences are explained below:

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

(Loss)/profit before taxation

(13,532)

(184)

(9,017)

337

(Loss)/profit on ordinary activities multiplied by rate of

 

 

 

 

Corporation tax in UK of 20% (2015: 21%)

(2,706)

(39)

(1,803)

71

Effects of:

 

 

 

 

Adjustments to tax in respect of prior years

212

(39)

(7)

(5)

Permanent timing differences

1,208

-

1,889

-

Difference on overseas rates of tax

(486)

18

-

(15)

Impact of overseas losses not recognised

1,755

12

-

-

Remeasurement of deferred tax

 

 

 

 

- change in UK tax rate to 18%

199

-

(11)

-

Other

-

(16)

-

-

Total taxation

182

(64)

68

51

 

The standard rate of corporation tax in the UK changed from 21% to 20% with effect from 1 April 2015. Accordingly, the Company's profits for this accounting period are taxed at an effective rate of 20%. The UK corporation tax rate is due to decrease further to 19% on 1 April 2017 and 17% on 1 April 2020, however, the latter is yet to be substantively enacted. 

UK deferred tax balances have been restated in these accounts and carried forward at a rate of 18%, being the current rate substantively enacted for periods from 1 April 2020 onwards.

6. DIVIDENDS

No interim or final dividends were paid in relation to the year ended 31 March 2015 and no interim dividend has been paid in relation to the year ended 31 March 2016. The Directors are not proposing a final dividend in respect of the financial year ended 31 March 2016.

 

 

7. (LOSS) / EARNINGS PER SHARE

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share trust (note 22) which are treated as cancelled.

For diluted loss per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares that have satisfied the appropriate performance criteria at 31 March 2016. For the year ended 31 March 2016, there was no difference in the weighted average number of shares used for basic and diluted net loss per ordinary share as the effect of all potentially dilutive ordinary shares was nil as both the outstanding options and PSP awards have not vested.

Reconciliations of the (loss)/earnings and weighted average number of shares used in the calculations are set out below.

 

2016

2015

 

(Loss) / earnings

£'000

Weighted average number of shares

'000s

Per-share amount

pence

(Loss) / earnings

£'000

Weighted average number of shares

'000s

Per-share amount

 pence

REPORTED

 

 

 

 

 

 

Basic loss per share

 

 

 

 

 

 

Loss attributable to ordinary shareholders

(13,714)

49,200

(27.87)

(120)

39,164

(0.31)

Effect of dilutive securities

 

 

 

 

 

 

Options

-

-

-

-

-

-

Diluted loss per share

(13,714)

49,200

(27.87)

(120)

39,164

(0.31)

UNDERLYING

 

 

 

 

 

 

(Loss) / Earnings attributable to ordinary shareholders

(13,714)

49,200

(27.87)

(120)

39,164

(0.31)

Amortisation of intangibles

307

-

0.62

302

-

0.77

Restructuring costs

794

-

1.61

649

-

1.66

Implementation of new ERP system

939

-

1.91

-

-

-

Refinancing

610

-

1.24

-

-

-

Profit on disposal of Property

(178)

-

(0.36)

-

-

-

Impairment of PPE - tooling

1,158

-

2.36

-

-

-

Impairment of goodwill

3,990

-

8.11

-

-

-

Net foreign exchange translation adjustments

(311)

-

(0.64)

494

-

1.26

Underlying basic (loss) / earnings /EPS

(6,405)

49,200

(13.02)

1,325

39,164

3.38

Underlying diluted (loss) / earnings /EPS

(6,405)

49,200

(13.02)

1,325

39,164

3.38

 

The above numbers used to calculate the EPS for the year ended 31 March 2016 and 31 March 2015 have been tax effected at the rate of20% respectively with the exception of Hornby Spain where the net deferred tax asset associated with the impairment in 2016 has not been recognised.

 

 

8. GOODWILL

GROUP

£'000

COST

 

At 1 April 2015

12,973

Exchange adjustments

34

At 31 March 2016

13,007

AGGREGATE IMPAIRMENT

 

At 1 April 2015

4,509

Charge for the year

3,990

Exchange adjustments

(8)

At 31 March 2016

8,491

Net book amount at 31 March 2016

4,516

COST

 

At 1 April 2014

13,027

Exchange adjustments

(54)

At 31 March 2015

12,973

AGGREGATE IMPAIRMENT

 

At 1 April 2014

4,497

Charge for the year

-

Exchange adjustments

12

At 31 March 2015

4,509

Net book amount at 31 March 2015

8,464

Net book amount at 31 March 2014

8,530

 

The Company has no goodwill.

The goodwill has been allocated to cash-generating units and a summary of carrying amounts of goodwill by geographical segment (representing cash-generating units) at 31 March 2016 is as follows:

GROUP

UK

£'000

USA

£'000

Spain

£'000

Italy

£'000

 

France

£'000

Germany

£'000

Total

£'000

At 31 March 2016

3,992

8

-

-

337

179

4,516

At 31 March 2015

3,992

8

3,990

-

295

179

8,464

 

Goodwill allocated to the above cash-generating units of the Group has been measured based on benefits each geographical segment is expected to gain from the business combination.

Impairment tests for goodwill

Management reviews the business performance based on geography. Budgeted revenue was based on expected levels of activity given results to date, together with expected economic and market conditions. Budgeted operating profit was calculated based upon management's expectation of operating costs appropriate to the business as reflected in the new business plan.

The relative risk adjusted (or 'beta') discount rate applied reflects the risk inherent in hobby based product companies. In determining this discount rate, management has applied an adjustment for risk of such companies in the industry on average determined using the betas of comparable hobby based product companies. The forecasts are based on approved budgets for the year ending 31 March 2017. Subsequent cash flows for the following two years have been increased in line with expectation of 4% growth based on the 3 year working capital model adopted by the business which incorporates the Group's strategy to integrate the European operations, reducing costs and opening up new revenue opportunities, particularly through E-Commerce. This model has been reviewed with external advisors as part of the recent refinancing process. Cash flows beyond the four-year period are extrapolated using the estimated growth rates stated below. The cash flows were discounted using a pre-tax discount rate of 13% (2015: 10%) which management believes is appropriate for all territories.

The key assumptions used for value-in-use calculations for the year ended 31 March 2016 are as follows:

GROUP

UK

(Corgi)

UK

(Humbrol)

France

Spain

Italy

Germany

Gross Margin1

46.2%

46.2%

59.7%

59.7%

59.7%

59.7%

Growth rate to perpetuity2

1.0%

1.0%

1.0%

1.0%

1.0%

1.0%

 

 

The key assumptions used for value-in-use calculations for the year ended 31 March 2015 are as follows:

GROUP

UK

(Corgi)

UK

(Humbrol)

France

Spain

Italy

Germany

Gross Margin1

30.3%

47.0%

37.9%

22.62%

32.4%

26.06%

Growth rate to perpetuity2

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

 

1.  Budgeted gross margin.

2. Weighted average growth rate used to extrapolate cash flows beyond the budget period.

These assumptions have been used for the analysis of each CGU within the operating segments.

For the UK CGU, the recoverable amount calculated based on value in use exceeded carrying value by £19.3 million. A reduction in operating profit by 50%, or a rise in discount rate to 29% would remove the remaining headroom. For the France CGU, the recoverable amount calculated based on value in use exceeded carrying value by £317k. A reduction in operating profit by 24%, or a rise in discount rate to 20% would remove the remaining headroom. For the Germany CGU, the recoverable amount calculated based on value in use exceeded carrying value by £5k. A reduction in operating profit by 1%, or a rise in discount rate to 14% would remove the remaining headroom.

 

9. INTANGIBLE ASSETS

GROUP

Brand names £'000

Customer lists £'000

Computer Software £'000s

Total

£'000

INTANGIBLE ASSETS

 

 

 

 

COST

 

 

 

 

At 1 April 2015

4,683

1,372

988

7,043

Additions

-

-

1,341

1,341

Exchange adjustments

130

33

-

163

At 31 March 2016

4,813

1,405

2,329

8,547

ACCUMULATED AMORTISATION

 

 

 

 

At 1 April 2015

1,897

1,075

-

2,972

Charge for the year

263

121

339

723

Exchange adjustments

43

32

-

75

At 31 March 2016

2,203

1,228

339

3,770

Net book amount at 31 March 2016

2,610

177

1,990

4,777

 

 

 

GROUP

Brand names £'000

Customer lists £'000

Computer Software £'000s

Total

£'000

INTANGIBLE ASSETS

 

 

 

 

COST

 

 

 

 

At 1 April 2014

4,887

1,423

-

6,310

Additions

-

-

988

988

Exchange adjustments

(204)

(51)

-

(255)

At 31 March 2015

4,683

1,372

988

7,043

ACCUMULATED AMORTISATION

 

 

 

 

At 1 April 2014

1,756

985

-

2,741

Charge for the year

240

137

-

377

Exchange adjustments

(99)

(47)

-

(146)

At 31 March 2015

1,897

1,075

-

2,972

Net book amount at 31 March 2015

2,786

297

988

4,071

Net book amount at 31 March 2014

3,131

438

-

3,569

 

All amortisation charges in the year have been charged in other operating expenses. The Company held no intangible assets.

10. PROPERTY, PLANT AND EQUIPMENT

 

GROUP

Freehold land and buildings £'000

Plant and equipment £'000

Motor

Tools and moulds

Total

vehicles £'000

£'000

£'000

COST

 

 

 

 

 

At 1 April 2015

2,952

         6,598

239

       55,039

 64,828

Exchange adjustments

              47

              88

     6

         1,030

 1,171

Additions at cost

 -

            395

 -

         2,826

  3,221

Transfer to current assets held for sale

(2,999)

 -

 -

 -

(2,999)

Disposals

 -

          (275)

(51)

(94)

(420)

At 31 March 2016

-

         6,806

 194

       58,801

65,801

ACCUMULATED DEPRECIATION

 

 

 

 

 

At 1 April 2015

1,371

         5,156

230

       47,811

54,568

Exchange adjustments

  47

              75

   7

            882

1,011

Charge for the year

     32

            544

               -

         3,129

         3,705

Transfer to current assets held for sale

(1,450)

 -

 -

 -

     (1,450)

Impairment

 -

 -

 -

         1,158

1,158

Disposals

 -

           (239)

 (43)

         (101)

(383)

At 31 March 2016

-

         5,536

 194

52,879

58,609

Net book amount at 31 March 2016

              - 

          1,270

 -

              5,922

       7,192

 

The impairment charge in the year relates to tooling held in Hornby Espana S.A and Hornby Hobbies Limited, which management no longer intend to use in the medium term operations of the business.

 

 

 

GROUP

Freehold land and buildings £'000

Plant and equipment £'000

Motor

vehicles £'000

Tools and moulds

£'000

Total

£'000

COST

 

 

 

 

 

At 1 April 2014

3,026

6,172

249

53,178

62,625

Exchange adjustments

(74)

(93)

(10)

(1,455)

(1,632)

Additions at cost

-

531

-

3,542

4,073

Disposals

-

(12)

-

(226)

(238)

At 31 March 2015

2,952

6,598

239

55,039

64,828

ACCUMULATED DEPRECIATION

 

 

 

 

 

At 1 April 2014

1,346

4,719

234

45,943

52,242

Exchange adjustments

(22)

(73)

(8)

(1,097)

(1,200)

Charge for the year

47

522

4

3,176

3,749

Disposals

-

(12)

-

(211)

(223)

At 31 March 2015

1,371

5,156

230

47,811

54,568

Net book amount at 31 March 2015

1,581

1,442

9

7,228

10,260

Net book amount at 31 March 2014

1,680

1,453

15

7,235

10,383

 

Freehold land amounting to £786,000 (2015: £786,000) has not been depreciated. The Group holds no finance leases (2015: none).

The Group has taken advantage of the exemption under IFRS 1 to use the valuation of certain land and buildings at the date of transition to IFRS as deemed cost. All other assets are stated at cost.

COMPANY

Freehold land and buildings £'000

Plant and equipment £'000

Total

£'000

COST

 

 

 

At 1 April 2015

2,428

4

2,432

Transfer to current assets held for sale

(2,428)

-

(2,428)

At 31 March 2016

-

4

4

ACCUMULATED DEPRECIATION

 

 

 

At 1 April 2015

1,221

4

1,225

Charge for the year

19

-

19

Transfer to current assets held for sale

(1,240)

-

(1,240)

At 31 March 2016

-

4

4

Net book amount at 31 March 2016

-

-

-

 

COMPANY

Freehold land and buildings £'000

Plant and equipment £'000

Total

£'000

COST

 

 

 

At 1 April 2014 and at 31 March 2015

2,428

4

2,432

ACCUMULATED DEPRECIATION

 

 

 

At 1 April 2014

1,187

4

1,191

Charge for the year

34

-

34

At 31 March 2015

1,221

4

1,225

Net book amount at 31 March 2015

1,207

-

1,207

Net book amount at 31 March 2014

1,241

-

1,241

 

The Company does not hold any assets under finance leases. Freehold land amounting to £786,000 (2015: £786,000) has not been depreciated.

Property, plant and equipment held for sale

At 31 March 2016 the Group had a clear intention to sell the land and buildings held by the Company and by its subsidiary Hornby Espana S.A and remain in a sales process for both sites. These assets have been reclassified as current assets under IFRS 5. During the year the Group sold part of the land and buildings held for sale.

 

 

Group

Company

 

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

 

Freehold land and buildings

 

 

 

 

 

COST

 

 

 

 

 

At 1 April 2015

 

-               

-         

-       

-   

Transfer from non-current assets

 

2,999              

-         

2,428      

-   

Disposals

 

(258)              

-         

(258)      

-   

At 31 March 2016

 

2,741              

-         

2,170      

-   

ACCUMULATED DEPRECIATION

 

 

 

 

 

At 1 April 2015

 

-              

-        

-       

-  

Transfer from non-current assets

 

1,418              

-        

1,240      

-  

Disposals

 

(139)             

-        

(139)     

-  

At 31 March 2016

 

1,279             

-        

1,101     

-  

Net book amount at 31 March 2016

 

1,462             

-        

1,069     

-  

Net book amount at 31 March 2015

 

-              

-        

-     

-  

                   

 

 

11. INVESTMENTS

COMPANY

The movements in the net book value of interests in subsidiary undertakings are as follows:

 

Interests in subsidiary undertakings at valuation £'000

Loans to subsidiary undertakings at cost

£'000

Total

£'000

At 1 April 2015

33,155

4,171

37,326

Capital contribution relating to share-based payment

(48)

-

(48)

Net increase in loans to subsidiary undertaking

-

663

663

Impairment of investment in subsidiary undertakings

(9,543)

-

(9,543)

At 31 March 2016

23,564

4,834

28,398

At 1 April 2014

33,053

4,171

37,224

Capital contribution relating to share-based payment

102

-

102

At 31 March 2015

33,155

4,171

37,326

 

Interest was charged on loans to subsidiary undertakings at Sterling three-month Libor + 3.6%.

Loans are unsecured and exceed five years' maturity.

The impairment of investments in the year relates to a write down to the investments held in Italy, France Spain and UK.

 

 

GROUP SUBSIDIARY UNDERTAKINGS

Details of the undertakings whose results or financial position affected the figures shown in the Company's annual accounts, are set out below. Hornby Hobbies Limited and Hornby España S.A. are engaged in the development, design, sourcing and distribution of models. Hornby America Inc., Hornby Italia s.r.l., Hornby France S.A.S. and Hornby Deutschland GmbH are distributors of models. Hornby Industries Limited and H&M (Systems) Limited are dormant companies.

 

 

 

Proportion of nominal value of issued shares held

 

Country of incorporation

Description of shares held

Group

%

Company

 %

Hornby Hobbies Limited

United Kingdom

Ordinary shares

100

100

Hornby America Inc.

USA

Ordinary shares

100

100

Hornby España S.A

Spain

Ordinary shares

100

100

Hornby Italia s.r.l.

Italy

Ordinary shares

100

100

Hornby France S.A.S.

France

Ordinary shares

100

100

Hornby Deutschland GmbH

Germany

Ordinary shares

100

100

Hornby Industries Limited

United Kingdom

Ordinary shares

100

100

H&M (Systems) Limited

United Kingdom

Ordinary shares

100

100

 

 

12. INVENTORIES

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Raw materials

-

917

-

-

Work in progress

57

101

-

-

Finished goods

13,580

11,451

-

-

 

13,637

12,469

-

-

 

13. TRADE AND OTHER RECEIVABLES

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

CURRENT:

 

 

 

 

Trade receivables

12,303

9,569

-

-

Less: provision for impairment of receivables

(540)

(375)

-

-

Trade receivables - net

11,763

9,194

-

-

Other receivables

103

681

-

-

Prepayments

1,326

569

74

12

Amounts owed by subsidiary undertaking

-

-

15,255

971

 

13,192

10,444

15,329

983

 

Concentrations of credit risk with respect to trade receivables are limited due to the Group's customer base being large and unrelated and therefore the provision for receivables impairments are deemed adequate. Credit insurance policies are in place in Hornby España S.A., Hornby Italia s.r.l., Hornby France S.A.S. and Hornby Deutschland GmbH covering trade receivables at 31 March 2016 to the value of £1.4 million (2015: £2.3 million).

 

 

Gross trade receivables can be analysed as follows:

 

2016

 £'000

2015

£'000

Fully performing

9,939

7,096

Past due

1,824

2,098

Fully impaired

540

375

Trade receivables

12,303

9,569

 

As of 31 March 2016, trade receivables of £1,824,000 (2015: £2,098,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

 

 

2016

 £'000

2015

£'000

1 - 120 days

1,451

1,928

>120 days

373

170

 

1,824

2,098

 

As of 31 March 2016, trade receivables of £540,000 (2015: £375,000) were impaired and provided for. The amount of provision was £540,000 (2015: £375,000) as of 31 March 2016.

Significant financial difficulties of the customer, probability that the customer will enter bankruptcy or financial reorganisation are considered indications that the trade receivable is impaired.

The ageing of these receivables is as follows:

 

2016

 £'000

2015

£'000

1 - 120 days

57

23

> 120 days

483

352

 

540

375

 

Movements on the Group provision for impairment of trade receivables are as follows:

 

2016

 £'000

2015

£'000

At 1 April

375

377

Provision for receivables impairment

163

40

Receivables written-off during the year as uncollectible

(23)

(22)

Exchange adjustments

25

(20)

At 31 March

540

375

 

The charge relating to the increase in provision has been included in 'administrative expenses' in the Statement of Comprehensive Income.

The carrying amounts of the Group and Company trade and other receivables are denominated in the following currencies:

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Sterling Intercompany

-

-

15,255

971

Sterling

7,648

5,617

-

12

Euro

3,907

4,307

-

-

US Dollar

311

465

-

-

HK Dollar

-

55

-

-

 

11,866

10,444

15,255

983

 

 

14. CASH AND CASH EQUIVALENTS

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Cash at bank and in hand

677

451

1

1

 

15. TRADE AND OTHER PAYABLES

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

CURRENT:

 

 

 

 

Trade payables

5,306

5,114

-

-

Other taxes and social security

797

950

14

19

Other payables

564

1,041

-

-

Accruals

696

1,962

80

-

 

7,363

9,067

94

19

 

16. PROVISIONS

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Sales returns

 

 

 

 

At 1 April

255

238

-

-

Charge to Statement of Comprehensive Income

784

597

-

-

Utilised in the year

(593)

(580)

-

-

At 31 March

446

255

-

-

 

Provision is made for future sales returns based on historical trends. The provision is expected to be utilised within one year from the balance sheet date.

17. CURRENT TAX ASSETS AND LIABILITIES

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Current tax assets

 

 

 

 

UK Corporation tax recoverable

168

371

-

50

Overseas Corporation tax recoverable

45

48

-

31

 

213

419

-

81

Current tax liabilities

 

 

 

 

UK Corporation tax liability

-

-

39

-

Overseas Corporation tax liability

-

53

-

-

 

-

53

39

-

 

 

 

18. BORROWINGS

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Secured borrowing at amortised cost

 

 

 

 

Bank overdrafts

7,706

7,698

-

-

Bank loan

177

212

-

-

Loan from subsidiary undertakings

-

-

4,902

4,511

 

7,883

7,910

4,902

4,511

Total borrowings

 

 

 

 

Amount due for settlement within 12 months

7,883

7,747

-

116

Amount due for settlement after 12 months

-

163

4,902

4,395

 

7,883

7,910

4,902

4,511

 

The Group obtained a covenant reset in the year for the following covenants:

The December 2015 and March 2016 quarterly covenant of the ratio of consolidated gross borrowings less consolidated total cash to consolidated EBITDA as well as the annual covenant requirement to clear down the borrowing facility to nil for 10 clear days.

The Company borrowings are denominated in Sterling. All intercompany borrowings are formalised by way of loan agreements. The loans can be repaid at any time however the Company has received confirmation from its subsidiary that they will not require payment within the next twelve months.

Analysis of borrowings by currency:

GROUP

Sterling

£'000

Euros

£'000

Total

£'000

31 March 2016

 

 

 

Bank overdrafts

7,704

2

7,706

Bank loan

-

177

177

 

7,704

179

7,883

31 March 2015

 

 

 

Bank overdrafts

6,039

1,659

7,698

Bank loan

-

212

212

 

6,039

1,871

7,910

 

The other principal features of the Group's borrowings are as follows:

At 31 March 2016 the Group had a revolving credit facility of £10 million expiring August 2019 and the future interest rates on this facility are Libor + 2.9%.

The average effective interest rate on bank overdrafts approximated 3.4% (2015: 4.07%) per annum and is determined based on 2.9% (2015: 3.6%) above three-month Libor.

Cash at bank and bank overdrafts of £7.0 million (2015: £7.2 million) are with financial institutions with a credit rating of A2 per Moody's rating agency.

Undrawn borrowing facilities

At 31 March 2016, the Group had available £3 million (2015: £9.2 million) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. Included within this the European subsidiaries had available £0.2 million (2015: £2.3 million) of undrawn import credit line facilities that could be obtained with security being given against trade receivables. The Group has recently renegotiated its banking facilities for the next three-and-a-half years, conditional on the completion of an additional equity raise of £8 million, details of which can be found within note 29 Post balance sheet events.

 

 

 

19. FINANCIAL INSTRUMENTS

The Group's policies and strategies in relation to risk and financial instruments are detailed in note 1.

 

Assets

Liabilities

GROUP

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Carrying values of derivative financial instruments

 

 

 

 

Forward foreign currency contracts - cash flow hedges

394

519

(12)

(24)

 

The hedged forecast transactions denominated in foreign currency are expected to occur at various dates during the next 12 months. Gains and losses recognised in reserves on forward foreign exchange contracts as of 31 March 2016 are recognised in the Statement of Comprehensive Income first in the period or periods during which the hedged forecast transaction affects the Statement of Comprehensive Income, which is within twelve months from the balance sheet date.

At 31 March 2016 the gross value of forward currency contracts was as follows:

 

2016

'000s

2015

'000s

US Dollar

11,800

21,862

 

The total net fair value above for forward foreign currency contracts comprises £382,000 asset (2015: £495,000 asset) of which £382,000 net asset (2015: £362,000 asset) represents an effective hedge at 31 March 2016 and therefore credited to Other Comprehensive Income in accordance with IAS 39. The balance of £nil (2015: £136,000 asset) was the ineffective portion and was included within operating expenses.

In accordance with IAS 39, the Group has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard. No embedded derivatives have been identified.

The Company has no derivative financial instruments.

Fair values of non-derivative financial assets and liabilities

For the Group and the Company, as at 31 March 2016 and 31 March 2015, there is no difference between the carrying amount and fair value of each of the following classes of financial assets and liabilities, principally due to their short maturity: trade and other receivables, cash at bank and in hand, trade and other payables and current borrowings. Bank deposits attract interest within 1.0% of the ruling market rate. There is no significant difference between the fair value and carrying amount of non-current borrowings as the impact of discounting is not significant.

Maturity of financial liabilities

GROUP

Bank loan

£'000

Overdraft facilities £'000s

Accounts payable and accruals £'000s

2016

Total

£'000

Less than one year

177

7,706

7,363

15,246

Between one and two years

-

-

-

-

Between two and five years

-

-

-

-

More than five years

-

-

-

-

 

177

7,706

7,363

15,246

 

 

Bank loan

£'000

Overdraft facilities £'000s

Accounts payable and accruals £'000s

2015

Total

£'000

Less than one year

49

7,698

8,967

16,714

Between one and two years

49

-

-

49

Between two and five years

114

-

-

114

More than five years

-

-

-

-

 

212

7,698

8,967

16,877

 

COMPANY

2016 Intercompany Debt

£'000

2015 Intercompany Debt

£'000

More than five years (note 18)

4,902

4,395

 

HIERARCHY OF FINANCIAL INSTRUMENTS

The following tables present the Group's assets and liabilities that are measured at fair value at 31 March 2016 and 31 March 2015. The table analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

·   Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

·   Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

·   Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

There were no transfers or reclassifications between Levels within the period. Level 2 hedging derivatives comprise forward foreign exchange contracts and have been fair valued using forward exchange rates that are quoted in an active market. The effects of discounting are generally insignificant for Level 2 derivatives.

The fair value of the following financial assets and liabilities approximate their carrying amount: Trade and other receivables, other current financial assets, cash and cash equivalents (excluding bank overdrafts), trade and other payables.

Financial Instruments

 

Level 1

£'000

Level 2

£'000

Level 3

£'000

Total

£'000

Assets

 

 

 

 

Trading derivatives

-

-

-

-

Derivatives used for hedging

-

394

-

394

Available-for-sale financial assets

-

-

-

-

Total assets as at 31 March 2016

-

394

-

394

Liabilities

 

 

 

 

Interest rate swap

-

-

-

-

Derivatives used for hedging

-

(12)

-

(12)

Total liabilities at 31 March 2016

-

(12)

-

(12)

 

 

Level 1

£'000

Level 2

£'000

Level 3

£'000

Total

£'000

Assets

 

 

 

 

Trading derivatives

-

-

-

-

Derivatives used for hedging

-

519

-

519

Available-for-sale financial assets

-

-

-

-

Total assets as at 31 March 2015

-

519

-

519

Liabilities

 

 

 

 

Interest rate swap

-

-

-

-

Derivatives used for hedging

-

(24)

-

(24)

Total liabilities at 31 March 2015

-

(24)

-

(24)

 

Interest rate sensitivity

The Group is exposed to interest rate risk as the Group borrows funds at both fixed and floating interest rates. The exposure to these borrowings varies during the year due to the seasonal nature of cash flows relating to sales.

In order to measure risk, floating rate borrowings and the expected interest costs are forecast on a monthly basis and compared to budget using management's expectations of a reasonably possible change in interest rates.

The effect on both income and equity based on exposure to borrowings at the balance sheet date for a 1.0% increase in interest rates is £83,000 (2015: £99,000) before tax. A 1% fall in interest rates gives the same but opposite effect. 1% is considered an appropriate benchmark given the minimum level of movement in the UK interest rate over recent years and expectation over the next financial year.

Foreign currency sensitivity

The Group is primarily exposed to fluctuations in US Dollars, and the Euro. The following table details how the Group's income and equity would increase on a before tax basis, given a 10% revaluation in the respective currencies against Sterling and in accordance with IFRS 7 all other variables remaining constant. A 10% devaluation in the value of Sterling would have the opposite effect. The 10% change represents a reasonably possible change in the specified foreign exchange rates in relation to Sterling.

 

 

 

 

Comprehensive Income and Equity Sensitivity

 

2016

£'000

2015

£'000

US dollars

995

60

Euros

1,067

845

 

2,062

905

 

Capital risk 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 and to maintain an optimal capital structure to reduce the cost of capital.

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 monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings as shown in the consolidated balance sheet less cash and cash equivalents. Total capital is calculated as 'equity' as shown in the balance sheet plus net debt.

 

2016

£'000

2015

£'000

Total borrowings (note 18)

7,883

7,910

Less:

 

 

Total cash and cash equivalents (note 14)

(677)

(451)

Net debt

7,206

7,459

Total equity

32,136

31,756

Total capital

39,342

39,215

Gearing

18%

19%

 

 

20. DEFERRED TAX

Deferred tax is calculated in full on temporary differences under the liability method.

The movement on the deferred tax account is as shown below:

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

At 1 April

(1,968)

(1,722)

121

126

Charge/(credit) to Statement of Comprehensive Income (note 5) - origination and reversal of temporary differences

233

(298)

(21)

(5)

Exchange adjustments

(45)

52

-

-

At 31 March

(1,780)

(1,968)

100

121

 

Deferred tax assets have been recognised in respect of tax losses in the UK only. Other temporary differences giving rise to deferred tax assets have been recognised in the UK where it is probable that those assets will be recovered.

No deferred tax is provided for tax liabilities which would arise on the distribution of profits retained by overseas subsidiaries because there is currently no intention that such profits will be remitted.

The movements in deferred tax assets and liabilities during the year are shown below.

Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset.

 

 

 

 

Group

Company

Deferred tax liabilities

Revaluation

£'000

Accelerated capital allowances

£'000

Acquisition intangibles

£'000

Other

£'000

Total

£'000

Revaluation

 £'000

Accelerated capital allowances

£'000

Total

£'000

At 1 April 2015

114

7

-

10

131

114

7

121

(Credit)/charge to Statement of Comprehensive Income

(14)

(7)

-

(10)

(31)

(14)

(7)

(21)

Transferred from deferred tax assets

-

-

111

-

111

-

-

-

At 31 March 2016

100

-

111

-

211

100

-

100

At 1 April 2014

117

9

-

10

136

117

9

126

(Credit)/charge to Statement of Comprehensive Income

(3)

(2)

-

-

(5)

(3)

(2)

(5)

At 31 March 2015

114

7

-

10

131

114

7

121

                   

 

 

Group

Company

Deferred tax assets

Short-term incentive plan

£'000

Acquisition intangibles

£'000

Other

£'000

Total

£'000

Short-term incentive plan

£'000

Total

£'000

At 1 April 2015

-

(161)

(1,938)

(2,099)

-

-

(Credit)/Charge to Statement of Comprehensive Income

-

272

(8)

264

-

-

Foreign exchange

-

-

(45)

(45)

-

-

Transferred to deferred tax liabilities

-

(111)

-

(111)

-

-

At 31 March 2016

-

-

(1,991)

(1,991)

-

-

At 1 April 2014

-

(142)

(1,716)

(1,858)

-

-

(Credit)/Charge to Statement of Comprehensive Income

-

(19)

(274)

(293)

-

-

Foreign exchange

-

-

52

52

-

-

At 31 March 2015

-

(161)

(1,938)

(2,099)

-

-

Net deferred tax (asset)/liability

 

 

 

 

 

 

At 31 March 2016

 

 

 

(1,780)

 

100

At 31 March 2015

 

 

 

(1,968)

 

121

 

 

 

2016

2015

GROUP

Recognised £'000

Not recognised £'000

Recognised £'000

Not recognised £'000

Deferred tax comprises:

 

 

 

 

Depreciation in excess of capital allowances

(1,404)

-

(1,054)

-

Other temporary differences - UK

(376)

-

(546)

-

Other temporary differences - overseas

-

(2,644)

(368)

(934)

Deferred tax (asset)/liability

(1,780)

(2,644)

(1,968)

(934)

 

The net deferred tax asset not recognised of £2,644,000 represents the unrecognised losses in Hornby Deutschland GmbH of £141,000 (2015: £67,000) and in Hornby Italia s.r.l of £1,361,000 (2015: £867,000), Hornby Espana S.A of £431,000 (2015: nil) and Hornby France S.A.S of £711,000 (2015: nil).

 

 

 

2016

2015

COMPANY

Recognised £'000

Not recognised £'000

Recognised £'000

Not recognised £'000

Deferred tax comprises:

 

 

 

 

Accelerated capital allowances

-

-

7

-

Other timing differences

100

-

114

-

Deferred tax liability

100

-

121

-

 

 

21. SHARE CAPITAL

GROUP AND COMPANY

Allotted, issued and fully paid:

 

2016

2015

Ordinary shares of 1p each

Number of shares

£'000

Number of shares

£'000

At 31 March

39,164,100

392

39,164,100

392

Issue or ordinary shares

15,789,474

158

-

-

At 1 April

54,953,574

550

39,164,100

392

 

On 12 August 2015 the Company issued 15,789,474 Ordinary 1 pence shares for 95 pence per share, totalling £15 million. At 31 March 2016 there were no options granted under the Company's share option schemes which remained outstanding.

22. SHARE-BASED PAYMENTS

Hornby Plc operates three share-based payment plans - Share Option Scheme ('SOS') and Performance Share Plan ('PSP').

SOS awards

The SOS awards are a reward of share options to Executive Directors and senior management that vest after three years and must be exercised in a four or seven year exercise window.

The awards issued in previous years were subject to a performance measure of Profit before Interest and Tax ('PBIT') or Profit before Tax ('PBT') as disclosed by the Group's accounts for any of the years ended 31 March 2006, 31 March 2007, 31 March 2008, 31 March 2009 or 31 March 2010 excluding (i) any profit or loss in relation to property transactions, (ii) any restructuring and abortive due diligence costs and (iii) any profits or losses arising from businesses acquired by the Group after the date of grant of the Option. Some awards are subject to achieving a PBIT that is equal to or greater than £8 million, or to PBT being equal to or greater than £9 million or aggregate PBT for three years ending 31 March 2008, 2009 and 2010 being equal to or greater than £32.7 million. The awards are equity settled.

Activity relating to share options for the years ended 31 March 2016 and 31 March 2015 was as follows:

 

2016

2015

 

Number

Weighted average exercise price

Number

Weighted average exercise price

Outstanding at 1 April

150,000

201.0p

365,809

201.0p

Exercised

-

-

-

-

Lapsed

(150,000)

201.0p

(215,809)

201.0p

Outstanding at 31 March

-

-

150,000

201.0p

 

No options were exercised within the financial year (2015: nil).

Performance Share Plan

All Performance Share Plan ('PSP') awards outstanding at 31 March 2016 vest only if performance conditions are met. Awards granted under the PSP must be exercised within one year of the relevant award vesting date.

The Group operates the PSP for Executive Directors and senior executives. Awards under the scheme are granted in the form of a nil-priced option, and are satisfied using market-purchased shares. The awards vest in full or in part dependent on the satisfaction of specified performance targets. 40% of the award vests dependent on TSR performance over a three-year performance period, relative to the constituents of the FTSE Small Cap Index (excluding investment trusts) from the time of grant, and the remaining 60% vests dependent on performance against earnings per share targets.

All plans are subject to continued employment. To the extent that such shares in the above plans are awarded to employees below fair value, a charge calculated in accordance with IFRS 2 'Share-based payment' is included within other operating expenses in the Statement of Comprehensive Income. This charge for the Group amounts to £18,000 and the credit for the Company amounted to £47,000 in the year ended 31 March 2016 (2015: £205,000 charge for the Group amount and the charge for the Company amounted to £102,000).

The following table summarises the key assumptions used for grants during the year:

 

2016 PSP1

2015 PSP1

Fair value (p)

68.61p

46.14p

Options pricing model used

Black Scholes (Stochastic)

Black Scholes (Stochastic)

Share price at grant date (p)

68.0p

71.0p

Exercise price (p)

nil

nil

Expected volatility (%)

32.4%

34.2%

Risk-free rate (%)

n/a

n/a

Expected option term (years)

3

3

Expected dividends (per year, %)

0%

0%

 

1Assumptions for TSR component only.

Assumptions on expected volatility and expected option term have been made on the basis of historical data, wherever available, for the period corresponding with the vesting period of the option. Best estimates have been used where historical data is not available in this respect.

23. EMPLOYEES AND DIRECTORS

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Staff costs for the year:

 

 

 

 

Wages and salaries

8,559 

8,444

834 

855

Share-based payments (note 22)

18 

205

(48)

103

Social security costs

1,090 

1,131

121 

110

Other pension costs (note 24)

555 

414

107 

92

Redundancy and compensation for loss of office

788 

16

133 

-

 

11,010 

10,210

1,147 

1,160

 

The redundancy costs form part of the restructuring costs in the year classified as exceptional items.

Average monthly number of people (including Executive Directors) employed by the Group:

 

Group

Company

 

2016

Number

2015

Number

2016

Number

2015

Number

Operations

47 

65

2

Sales, marketing and distribution

139 

140

-

Administration

44 

47

3

 

230 

252

5

 

Key management compensation:

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

Salaries and short-term employee benefits

1,780

1,799

839 

855

Share-based payments

18 

205

(48)

103

Other pension costs

172 

171

107 

92

Redundancy and compensation for loss of office

544 

-

133 

-

 

2,514 

2,175

1,031 

1,050

 

Key management comprise the individuals involved in major strategic decision making and includes all Group and subsidiary Directors.

A detailed numerical analysis of Directors' remuneration and share options showing the highest paid Director, number of Directors accruing benefits under money purchase pension schemes, is included in the Directors' Report on pages 13 to 18 and forms part of these financial statements.

24. PENSION COMMITMENTS

The Group operates a defined contribution pension scheme by way of a Stakeholder Group Personal Pension Plan set up through the Friends Provident Insurance Group.

Alexander Forbes International is appointed as Independent Financial Adviser to work in liaison with the Company.

The level of contributions to the Group Personal Pension Plan for current members is fixed by the Company.

The Group pension cost for the year was £555,000 (2015: £414,000) representing the actual contributions payable in the year and certain scheme administration costs. The Company pension cost for the year was £107,000 (2015: £92,000). No contributions were outstanding at the year end of 31 March 2016.

25. FINANCIAL COMMITMENTS

GROUP

2016

£'000

2015

£'000

At 31 March capital commitments were:

 

 

Contracted for but not provided

414

1,706

 

The commitments relate to the acquisition of property, plant and equipment.

The Company does not have any capital commitments.

Contingent Liabilities

The Company and its subsidiary undertakings are, from time to time, parties to legal proceedings and claims, which arise in the ordinary course of business. The Directors do not anticipate that the outcome of these proceedings and claims, either individually or in aggregate, will have a material adverse effect upon the Group's financial position.

26. OPERATING LEASE COMMITMENTS

The total of future minimum lease payments in respect of non-cancellable property, plant and motor vehicle operating leases falling due are as follows:

GROUP

2016

£'000

2015

£'000

Not later than one year

472

494

Later than one year but not more than five years

1,087

536

More than five years

259

-

 

1,818

1,030

 

The distribution arm of the business continues to be outsourced to a third party company, DS Logistics. The initial agreement with DS Logistics was for 5 years from August 2014 and approximate costs under the contract if it were to be terminated early are approximately £1 million a year for the remainder of the term.

 

 

27. GROUP AND COMPANY Cash Flows from Operating Activities

 

Group

Company

 

2016

£'000

2015

£'000

2016

£'000

2015

£'000

(Loss) / profit before taxation

(13,532)

(184)

(9,017)

337

Interest payable

429

506

181

192

Interest receivable

(21)

(1)

(174)

(174)

Amortisation of intangible assets

         723

377

-

-

Impairment of Goodwill

3,990

-

-

-

Impairment of Investment

-

-

9,543

-

Depreciation

3,705

3,749

19

34

Impairment of tooling

1,158

-

-

-

(Gain) / loss on disposal of property, plant and equipment

(193)

(5)

(223)

-

Share-based payments

18

205

(48)

103

Loss / (gain) on financial derivatives

135

(102)

-

-

Increase in provisions

191

17

-

-

(Increase) / decrease in inventories

(650)

166

-

-

Increase in trade and other receivables

(2,351)

(1,883)

(62)

(643)

(Decrease) / increase  in trade and other payables

(3,212)

1,685

75

(43)

(Decrease) / increase in derivative financial instruments

(22)

798

-

-

Cash (used in) / generated from operations

(9,632)

5,328

294

(194)

 

28. RELATED PARTY DISCLOSURES

 

B Ahir is our Managing Director of Hornby Hobbies Asia and a Director of Hornby Hobbies Limited, a subsidiary of Hornby Plc. 28One, not to be confused with companies of a similar name, owned by B Ahir has provided ongoing support to manage product delivery for which Hornby Hobbies has paid £176,000 in relation to these services in the year. No payments remained outstanding to 28One as at 31 March 2016. Hornby Hobbies Limited continues to use these services on an ongoing basis.

 

Additionally, in Hornby France S.A.S the Group leased its French warehouse and office from Mr and Mrs Lanter who were both general managers and statutory directors of Hornby France S.A.S until January 2016 for approx. €10,000 a month. The Group has since terminated this lease.

There were no other contracts with the Company or any of its subsidiaries existing during or at the end of the financial year in which a Director of the Company or any of its subsidiaries was materially interested. There are no other related-party transactions.

The Company received management fees from subsidiaries of £1,316,000 (2015: £1,346,000), interest of £174,000 (2015: £174,000) and dividends from subsidiaries of £nil (2015: £ nil) and incurred interest of £181,000 (2015: £192,000) on intercompany borrowings. It also received a rental income of £450,000 (2015: £450,000).

29. POST BALANCE SHEET EVENTS

 

Group Refinancing

The announcement today of a proposed £8 million equity placing will allow us to reduce reliance on debt facilities and we have signed a new revolving credit facility of £10 million with our main UK bankers Barclays. This facility is conditional on the additional equity raise being approved by shareholders and is expected to allow sufficient headroom for trading working capital and capital expenditure needs up to December 2019.

 

Board Changes

On 26 April 2016, we announced that Group Finance Director, Steve Cooke, was appointed Chief Executive. Steve joined the business in June 2015 and has been making a significant contribution as we continue to make progress with our strategy to drive the Group's turnaround.

On 26 May 2016, the Company announced that David Mulligan had been appointed Interim Group Finance Director. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc and has a successful track record of working with companies undergoing change.

 

Sale of Property, Plant and Equipment

On 13 June 2016 the Group disposed of its building in Hornby Espana S.A for a consideration of €1.3 million.

 

Shareholders' Information Service

 

 

 

Hornby welcomes contact with its shareholders.

 

If you have questions or enquiries about the Group or its products, please contact:

 

D Mulligan, Finance Director

Hornby Plc

3rd Floor, The Gateway

Innovation Way

Discovery Park

Sandwich

Kent CT13 9FF

www.hornby.com

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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