Hornby Regulatory News (HRN)

2 Jun 2006 07:01

Hornby PLC02 June 2006 HORNBY DELIVERS SEVENTH YEAR OF PROFIT GROWTH AS INTERNATIONAL OPERATIONS COME ON STREAM Hornby Plc ("Hornby"), the international hobby products group, has todayannounced its preliminary results for the year ended 31 March 2006. •Pre-tax profits up 8% to £8.2 million (2005: £7.6 million)* *Both years reported on the basis of IFRS•Turnover reduced by 2% to £44.1 million (2005: £45.0 million)•Earnings per share up 4% to 15.64p (2005: 15.06p)•Profits generated in newly acquired overseas subsidiaries•Acquisition of French distributor MKD completed•Hornby Digital Control System launched at London Toy Fair•Final dividend of 5.4p recommended - Total dividend up 10% to 7.7p (2005:7.0p) Frank Martin, Chief Executive of Hornby, said, " We are delighted with the performance that the Group has delivered. This isthe seventh consecutive year of profits growth. Despite the challenging backdropof our core UK market, we have demonstrated once again the robust nature of thehobbyist market. Our international operations are now profitable and we areconfident that they will continue to deliver encouraging progress in the future. " The launch of the Scalextric Sport Digital System has been extremelysuccessful. This major advance in technology has been further developed to offerdigital control racing across a wider range of price points, thus bringingsignificantly enhanced play-value into the mass market for slot racing. Advancesin technology have also enabled us to launch the Hornby Digital Control System,which has been extremely well received. I am confident, as we roll this out inour other model railway brands, that this will prove to be a further boost tosales growth. " Hornby's revenue base is now much broader. We have made a number ofacquisitions in Europe and they have all been fully integrated into the Group.We have established a strong brand portfolio across a number of differentmarkets. " Looking to the future, we remain confident that our overseas operations willcontinue to drive our growth. We are now focused on building the scale of ourmarketing and sales distribution, in both Model Railways and Scalextric slot carracing so that we can take advantage of the opportunities in important marketsin Germany, Italy, France and Spain. I look forward to reporting furtherprogress. The Hornby Group is in excellent health." -ends- Date: 2 June 2006For further information contact: Hornby Plc cityPROFILEFrank Martin, Chief Executive Simon CourtenayJohn Stansfield, Finance Director Andrew Harris01843-233500 020-7448-3244On 2 June 2006: 020-7448-3244Web: www.hornby.com or: www.scalextric.com High resolution images are available for the media to view and download free of charge from www.vismedia.co.uk Hornby Plc - Chairman's Statement Year ended 31 March 2006 Introduction I am delighted once again to report an encouraging performance for the year.This has been achieved despite the background of a weaker consumer environmentin the UK, our main market. Whilst overall sales decreased by 2% to £44.1 million, pre-tax profit at £8.2million is 8% above last year's result (£7.6 million). Both years are reportedon the basis of IFRS. Basic earnings per share rose by 4% to 15.64p. We highlighted on a number of occasions during the year, the difficultconditions in the UK market. However, as a result of early action to bring costsin line with sales expectations we were able to mitigate the worst effects ofthe sales downturn in the UK. Shareholders will be aware that the managementteam has also taken steps to broaden and diversify the Group's revenue streams.We have acquired a number of overseas businesses to take advantage of theopportunities in new markets. These businesses have been fully integrated andare performing very well. Significantly, both the recently established HornbyItalia and Hornby France subsidiaries were able to contribute positively toGroup profit in the year. Dividend Reflecting the continued progress that the Group has made, the Board isrecommending a final dividend of 5.4p per ordinary share. This will be paid toshareholders on the register at 28 July 2006 and will be paid on 18 August 2006. Taken together with the interim dividend, this gives a total dividend for theyear of 7.7p, an increase of 10% over the dividend of 7.0p declared in theprevious financial year. We remain committed to rewarding our shareholders witha dividend of approximately 50% of earnings per share. Review of the Business Despite the backdrop of a difficult trading environment in the UK market we arepleased with the performance of our UK business. Weaker consumer demand, firstreported at our AGM in July 2005, continued through to Christmas. However ourstrong network of independent retailers and in-store concessions continued tooffer a prominent high-street presence. This, coupled with a strong new productintroduction programme in the period January-March 2006, resulted in sales inthis final quarter of the year exceeding our earlier expectations, confirmingonce again the defensive nature of our hobby-based products in times of generalconsumer uncertainty. One of the most significant developments in recent years has been the launch in2004 of the Scalextric Sport Digital System (SSD). Customer reaction has beenexcellent. SSD is now gaining recognition worldwide as the system of choice fordigital slot car racing, combining easy compatibility with existing systems andan excellent record of reliability. This year we have introduced a number of newproducts within SSD, aimed at securing wider distribution around the world, atmass-market price points. We believe that, over time, the market will movedecisively towards digital control. The patented SSD technology places Hornby inpole position to take advantage of this shift in the market. At the London Toy Fair in January 2006 we launched the Hornby Digital ControlSystem for model railways. This system uses similar technology to SSD and bothsystems will benefit from the economies of scale thus derived. In this way theGroup is also able to leverage investment in Research and Development. The price points of the Hornby system are very competitive and the system hasbeen designed with ease of operation in mind. We expect an increasing proportionof our model railway products to be sold as digital-enabled over the comingyears. We plan to roll out the launch of the Hornby system, suitably branded,through our overseas subsidiaries at the Toy Fairs in 2007. International subsidiaries The UK market for model railways represents only c.10% of the total Europeanmarket. The major manufacturers in Europe have experienced difficulties inrecent years as a result of their continued focus on manufacturing in Europe.Hornby embarked upon a strategy some 3 years ago to acquire a series of strongEuropean brands that would lend themselves to relocation of manufacturing toChina and the subsequent revitalisation of their European distribution. The first of these acquisitions, our Spanish operation Electrotren, made goodprogress in expanding the distribution of the Superslot brand in Spain duringthe year, supported by the exclusive rights in Spain during 2005 to use onslot-car racing products the image and name of Formula 1 World Champion FernandoAlonso. Consequently overall sales revenues increased significantly. However, areduction in the number of new Electrotren model railway introductions occurredduring the year, as a result of longer lead times associated with the latesthigh specification designs now being developed. Consequently Electrotren made areduced contribution to Group profit during the year. New model introductionsare now on track and we are looking forward to a year of significant progressfrom Electrotren. Shareholders will recall that we acquired certain assets of Lima SpA in December2004, and subsequently commenced trading as Hornby Italia. We have madeexcellent progress in re-establishing this business. During the year, we haverelocated the operations to new premises in Brescia, Northern Italy andcommenced production in China of the first ranges. We have also improved thesales and distribution network in Europe and this has shown through in thefinancial results. This has been very much a year of transition for HornbyItalia, and therefore the achievement of an operating profit is particularlyencouraging. Similarly, the achievement of a positive operating profit in Hornby France isalso encouraging. We acquired the goodwill and certain assets of our Frenchdistributor MKD in December 2005, and began trading as Hornby France from 1January 2006. The rationale for this acquisition was based on our ownership ofthe French brand leader in model railways - Jouef - acquired as part of the Limaassets. It was clear that the opportunity to relaunch the Jouef brand in Francevia a wholly owned Hornby company would deliver the best return to ourshareholders. That Hornby France has been able to make a contribution to profitin its first 3 months of trading bodes well for the future performance of thissubsidiary. We expect both Hornby Italia and Hornby France to produce asignificantly improved performance in the new financial year. The European subsidiaries in total contributed operating profits of £453,000 tothe Group result. Results in Scalextric USA were much better than the previous year. Sales were upby 9% at $5.1 million. The loss before tax of $141,000 in the previous year wasturned round to a profit before tax of $116,000 as a result of actions taken toreduce overheads and increase sales efforts. In addition, as previouslyreported, margins generated in Hornby Hobbies in the UK on sales made toScalextric USA have the effect of increasing significantly the overallcontribution to Group profit of our US operation. We are looking for a furtherimprovement in the USA during the new financial year. In our International subsidiaries, both in Europe and the USA, we now havecommitted management teams who are capable of driving further sales and profitsgrowth. Product development Our product development programme is the engine room of our business and we havecontinued to focus on maintaining a full new product pipeline. During the yearwe have increased our resources in this area, to cope with the additionaldemands of our subsidiaries and to design new products specifically for thosemarkets. We are confident that as these newly designed products come on stream,there will be a resurgence of interest in our ranges throughout Europe, in thesame way as our Hornby model railways business in the UK benefited from theinflux of new products produced in China from 2000 onwards. Outlook Three years ago we recognised that although the Group was performing well, theHornby model railway business was effectively trapped in the UK market as aresult of the scale (00) and the exclusive focus on UK subject matter. It wasclear that in order to ensure a continued pattern of sales and profits growth wehad to expand our activities outside the UK. Our acquisitions of Electrotren in Spain, the Lima assets in Italy and theassets of MKD in France now provide the Group with the widest brand and productportfolio in the worldwide model railway market, together with the distributioninfrastructure to capitalise on these assets. We have proved that we have theexpertise to re-invigorate our hobby brands in the UK and we have enjoyed asignificant renaissance in the popularity of model railways and slot car racing.We have worked hard to extend the appeal of our brands across the age ranges andto increase sales. We now have a major opportunity to repeat this success withour overseas businesses, both in model railways and slot racing. We own a superbportfolio of brands which have strong potential for growth. We expect trading in the UK market to be challenging again in the new financialyear. However, the overseas subsidiaries are all now extremely well placed tobecome the main drivers of growth in the business during the coming years. Theoutlook for the Group is bright and we look forward to the future withconfidence. Neil JohnsonChairman2 June 2006 GROUP INCOME STATEMENTFOR THE YEAR ENDED 31 MARCH 2006 Group 2006 2005 (unaudited) (unaudited) £'000 £'000 REVENUE 44,113 45,006Cost of sales (20,820) (22,613)------------------------------------------------------------ GROSS PROFIT 23,293 22,393 Distribution costs (1,504) (1,312)Selling and marketing costs (9,924) (9,508)Administrative expenses (3,354) (3,910)Other operating (expenses)/income (217) 51------------------------------------------------------------GROUP OPERATING PROFIT 8,294 7,714 Finance income 30 47Finance costs (160) (176)------------------------------------------------------------PROFIT BEFORE TAXATION 8,164 7,585 Taxation (2,306) (1,993)------------------------------------------------------------PROFIT FOR THE YEAR 5,858 5,592============================================================EARNINGS PER ORDINARY SHAREBasic 15.64p 15.06pDiluted 15.08p 14.38p All of the activities of the Group are continuing. GROUP BALANCE SHEETAT 31 MARCH 2006 Group 2006 2005 (unaudited) (unaudited) £'000 £'000ASSETSNON-CURRENT ASSETSGoodwill 8,116 7,751Intangible assets 1,608 1,418Property, plant and equipment 5,539 5,096Deferred tax assets 355 353------------------------------------------------------------ 15,618 14,618------------------------------------------------------------ CURRENT ASSETSInventories 8,227 7,526Trade and other receivables 9,325 7,199Cash and cash equivalents 829 1,860------------------------------------------------------------ 18,381 16,585------------------------------------------------------------ LIABILITIESCURRENT LIABILITIESBorrowings 119 23Trade and other payables 6,914 7,637Current tax liabilities 1,542 1,100------------------------------------------------------------ 8,575 8,760------------------------------------------------------------ NET CURRENT ASSETS 9,806 7,825------------------------------------------------------------ NON-CURRENT LIABILITIESBorrowings 44 80Deferred tax liabilities 217 222Provisions for other liabilities and charges 300 369------------------------------------------------------------ 561 671------------------------------------------------------------NET ASSETS 24,863 21,772============================================================ SHAREHOLDERS' EQUITYShare capital 376 373Share premium 5,050 4,906Other reserves 2,466 2,483Retained earnings 16,971 14,010------------------------------------------------------------ TOTAL EQUITY 24,863 21,772============================================================ GROUP STATEMENT OF CHANGES IN EQUITYfor the years ended 31 March 2006 and 31 March 2005 Capital Share Share Redemption Revaluation Other Retained Total Capital Premium Reserve Reserve Reserves Earnings* Equity (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 April 2004 370 4,797 55 757 1,688 11,022 18,689 Profit for the period - - - - - 5,592 5,592Amortisation of revaluation surplus - - - (17) - 17 -Issue of shares 3 109 - - - - 112Share based payments - - - - - (84) (84)Exchange adjustment offsetin reserves - - - - - 26 26Purchase of own shares - - - - - (278) (278)Shares vested - - - - - 64 64Dividends - - - - - (2,349) (2,349)--------------------------------------------------------------------------------------------------------------------Balance at 31 March 2005 373 4,906 55 740 1,688 14,010 21,772Adoption of IAS 32 and IAS 39 - - - - - (38) (38)--------------------------------------------------------------------------------------------------------------------Balance at 1 April 2005 373 4,906 55 740 1,688 13,972 21,734 Profit for the period - - - - - 5,858 5,858Amortisation of revaluation surplus - - - (17) - 17 -Issue of shares 3 144 - - - - 147Share based payments - - - - - 158 158Exchange adjustment offsetin reserves - - - - - (111) (111)Purchase of own shares - - - - - (364) (364)Shares vested - - - - - 138 138Dividends - - - - - (2,697) (2,697)--------------------------------------------------------------------------------------------------------------------Balance at 31 March 2006 376 5,050 55 723 1,688 16,971 24,863==================================================================================================================== * Attributable to equity holders of the Company. GROUP CASH FLOW STATEMENTFOR THE YEAR ENDED 31 MARCH 2006 Group 2006 2005 (unaudited) (unaudited) £'000 £'000 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 7,546 9,222Interest received 30 47Interest paid (160) (176)Tax paid (1,939) (2,557)--------------------------------------------------------------------------------Net cash generated from operating activities 5,477 6,536-------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIESPurchase of trade assets and related costs (1,072) (5,971)Proceeds from sale of property, plant and equipment 23 227Purchase of property, plant and equipment (2,545) (2,220)--------------------------------------------------------------------------------Net cash utilised in investing activities (3,594) (7,964)-------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of ordinary shares 147 112Purchase of own shares by STIP (364) (278)Finance lease capital payments (23) (30)Dividends paid to Company's shareholders (2,697) (2,349)--------------------------------------------------------------------------------Net cash utilised in financing activities (2,937) (2,545)-------------------------------------------------------------------------------- Effect of exchange rate movements (60) 27-------------------------------------------------------------------------------- Net decrease in cash and bank overdrafts (1,114) (3,946)Cash and bank overdrafts at beginning of the year 1,860 5,806--------------------------------------------------------------------------------CASH AND BANK OVERDRAFTS AT END OF YEAR 746 1,860================================================================================ CASH AND CASH EQUIVALENTS CONSIST OF:Cash and cash equivalents 829 1,860Bank overdrafts (83) ---------------------------------------------------------------------------------CASH AND BANK OVERDRAFTS AT END OF YEAR 746 1,860================================================================================ NOTES TO THE CASH FLOW STATEMENT (a) CASH FLOW FROM OPERATING ACTIVITIES Group 2006 2005 (unaudited) (unaudited) £'000 £'000 Profit for the financial year 5,858 5,592Taxation 2,306 1,993Interest payable 160 176Interest receivable (30) (47)Amortisation of intangible assets 97 33Depreciation 2,075 1,850Profit on disposal of tangible fixed assets (11) (29)Share based payments 158 (84)Gain on financial derivatives (38) -Decrease in provisions (69) (158)(Increase)/decrease in inventories (219) 258Increase in trade and other receivables (2,058) (1,171)(Decrease)/increase in trade and other payables (683) 809--------------------------------------------------------------------------------CASH GENERATED FROM OPERATIONS 7,546 9,222================================================================================ (b) ANALYSIS OF NET FUNDS 31 March Net Cash Foreign 31 March 2005 Flows Exchange 2006 (unaudited) (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 £'000 Cash and cash equivalents 1,860 (971) (60) 829Bank borrowings - within one year - (78) - (78) - after one year - (5) - (5)----------------------------------------------------------------------------------------------- 1,860 (1,054) (60) 746Due within one year:Finances leases (23) (18) - (41)Due after one year:Finance leases (80) 41 - (39)-----------------------------------------------------------------------------------------------NET FUNDS 1,757 (1,031) (60) 666=============================================================================================== SEGMENTAL REPORTING The primary reporting format for segmental purposes is geographic, as this isthe basis on which the Group is organised and managed. Transactions with andbalances to the other segments have been identified above and eliminated. Hornby's secondary segment is business and as the Group operates on a singlebusiness segment, further analysis is not required here. Rest Total of Reportable IntraYear ended UK USA Europe Segment Group Group31 March 2006 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 £'000 £'000 £'000 Revenue - External 34,196 2,952 6,965 44,113 - 44,113 - Other segments 3,301 - 566 3,867 (3,867) ------------------------------------------------------------------------------------------------------------------ Operating profit 7,747 94 453 8,294 - 8,294Interest expense - External (151) - (9) (160) - (160) - Other segments - (30) (551) (581) 581 -Interest income - External 13 3 14 30 - 30 - Other segments 581 - - 581 (581) ------------------------------------------------------------------------------------------------------------------Profit before tax 8,190 67 (93) 8,164 - 8,164Taxation (2,307) (16) 17 (2,306) - (2,306)-----------------------------------------------------------------------------------------------------------------Profit for the year 5,883 51 (76) 5,858 - 5,858================================================================================================================= Segment assets 32,169 990 15,483 48,642 (14,860) 33,782Less inter company debtors (14,403) - (457) (14,860) 14,860 ------------------------------------------------------------------------------------------------------------------Total assets 17,766 990 15,026 33,782 - 33,782================================================================================================================= Segment liabilities 7,387 916 15,476 23,779 (14,860) 8,919Less inter company creditors (13) (899) (13,948) (14,860) 14,860 ------------------------------------------------------------------------------------------------------------------Total liabilities 7,374 17 1,528 8,919 - 8,919================================================================================================================= Other segment itemsCapital expenditure 1,800 42 1,719 3,561 - 3,561(including acquisitions)Depreciation 1,779 9 287 2,075 - 2,075Amortisation of intangible assets - - 97 97 - 97----------------------------------------------------------------------------------------------------------------- Rest Total of ReportableYear ended UK USA Europe Segment Elimination Group31 March 2005 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 £'000 £'000 £'000 Revenue - External 39,572 2,488 2,946 45,006 - 45,006 - Other segments 2,229 - - 2,229 (2,229) ------------------------------------------------------------------------------------------------------------------Operating profit 7,411 (38) 341 7,714 - 7,714Interest expense - External (143) (15) (18) (176) - (176) - Other segments - (21) (327) (348) 348 -Interest income - External 41 - 6 47 - 47 - Other segments 348 - - 348 (348) ------------------------------------------------------------------------------------------------------------------Profit before tax 7,657 (74) 2 7,585 - 7,585Taxation (1,871) 20 (142) (1,993) - (1,993)-----------------------------------------------------------------------------------------------------------------Profit for the year 5,786 (54) (140) 5,592 - 5,592=================================================================================================================Segment assets 29,285 929 12,435 42,649 (11,668) 30,981Less inter company debtors (11,631) - (37) (11,668) 11,668 ------------------------------------------------------------------------------------------------------------------Total assets 17,654 929 12,398 30,981 - 30,981=================================================================================================================Segment liabilities 8,398 981 11,498 20,877 (11,668) 9,209Less inter company creditors (9) (956) (10,703) (11,668) 11,668 ------------------------------------------------------------------------------------------------------------------Total liabilities 8,389 25 795 9,209 - 9,209=================================================================================================================Other segment itemsCapital expenditure 2,082 43 6,189 8,314 - 8,314(including acquisitions)Depreciation 1,590 9 251 1,850 - 1,850Amortisation of intangible assets - - 33 33 - 33----------------------------------------------------------------------------------------------------------------- NOTES: 1. Basis of preparation The financial information for the year ended 31 March 2006 has been prepared inaccordance with International Accounting Standards ('IAS') and InternationalFinancial Reporting Standards ('IFRS') as adopted by the European Union ('EU')and also as issued by the International Accounting Standards Board,International Financial Reporting Interpretations Committee interpretations andwith those parts of the Companies Act 1985 applicable to companies reportingunder IFRS. This information does not constitute statutory accounts and has notbeen audited. References to IFRS throughout refer to the application of InternationalAccounting Standards and International Financial Reporting Standards. Hornby Plc consolidated financial statements were prepared in accordance with UKGenerally Accepted Accounting Principles ('UK GAAP') until 31 March 2005. Inpreparing Hornby Plc 2005 consolidated financial information, management hasamended certain accounting, valuation and consolidation methods applied in theUK GAAP financial statements to comply with IFRS. The comparative figures inrespect of the year ended 31 March 2005 were restated to reflect theseadjustments, except as described in the accounting policies. Reconciliations and descriptions of the effect of the transition from UK GAAP toIFRS on the Group's equity and its net income and cash flows are provided innote 6. 2. Non statutory accounts These statements do not constitute statutory financial statements within themeaning of Section 240 of the Companies Act 1985. The financial statements forthe year ended 31 March 2005 were prepared in accordance with UK GAAP and havebeen delivered to the Registrar of Companies and on which the auditors made anunqualified report. The comparative figures for the year ended 31 March 2005have been prepared as set out above and are an abridged statement of the fullfinancial statements (as restated for IFRS) for that period. 3. Earnings per share The calculation of earnings per ordinary share is based on the profits aftertaxation for the period of £5,858,000 (year ended 31 March 2005 - £5,592,000)and the weighted average number of ordinary shares in issue during the period of37,447,229 (year ended 31 March 2005 - 37,141,538). The calculation of diluted earnings per ordinary share is based on the weightedaverage number of ordinary shares in issue as adjusted to assume conversion ofall dilutive potential ordinary shares, 38,842,053 (year ended 31 March 2005 -38,888,321). 4. Short Term Incentive Plan 164,861 ordinary shares to the value of £364,397 were acquired by the EmployeeBenefit Trust in June 2005 in accordance with the incentive plan, details ofwhich were included in the 2005 Annual Report and Accounts. The Trust waives its right to dividends. 5. Principal Accounting Policies The principal accounting policies that the Group has adopted in its 31 March2006 financial statements being prepared under IFRS, and which have beenconsistently applied in the preparation of this financial information, are setout below. Basis of consolidation The Group financial statements consolidate the financial statements of theCompany and all its subsidiaries as at 31 March each year prepared under IFRSusing consistent accounting policies. The results of subsidiaries acquired areincluded in the consolidated profit and loss account from the date controlpasses. Intra group sales are eliminated on consolidation. Foreign currency translation Transactions in foreign currencies are translated at the exchange rate ruling atthe date of the transaction. Monetary assets and liabilities denominated inforeign currencies are translated at the exchange rates ruling at the balancesheet date and any exchange differences are taken to the income statement. On consolidation, income statements and cash flows of foreign subsidiaries aretranslated into pounds sterling using average rates that existed during theaccounting period. The balance sheets of foreign subsidiaries are translatedinto pounds sterling at the rates of exchange ruling at the balance sheet date.Gains or losses arising on the translation of opening and closing net assets arerecognised in the statement of changes in equity. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Goodwill recognised under UK GAAP prior to 1 April2004, the date of transition to IFRS, is stated at net book value as at thisdate. Goodwill on business combinations recognised subsequent to 1 April 2004 istested annually for impairment and carried at cost less accumulated impairmentlosses. (b) Trade names Trade names are capitalised at fair value as at the date of acquisition. Theyare carried at their fair value less accumulated amortisation and anyaccumulated impairment losses. Amortisation is calculated using thestraight-line method to allocate the fair value of trade names over theirestimated economic life of 20 years. (c) Existing customer relationships Existing customer relationships are capitalised at fair value as at the date ofacquisition. They are carried at their fair value less accumulated amortisationand any accumulated impairment losses. Amortisation is calculated using thestraight-line method to allocate the fair value of customer relationships overtheir estimated economic life of 10 years. (d) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred ondevelopment projects (relating to the design and testing of new products) arerecognised as intangible assets when it is probable that the project will be asuccess, considering its commercial and technological feasibility, and costs canbe measured reliably. Other development expenditures are recognised as anexpense as incurred. Tangible fixed assets Land and buildings are shown at cost or valuation less accumulated depreciation.Assets revalued prior to the transition to IFRS use this valuation as deemedcost at this date. Depreciation is provided at rates calculated to write off the cost or valuationof each asset, on a straight-line basis (with the exception of tools and moulds)over its expected useful life, as follows: Freehold buildings - 30 to 50 yearsPlant and equipment - 5 to 10 yearsMotor vehicles - 4 years Tools and moulds are depreciated at varying rates in line with the relatedestimated product sales on an item-by-item basis up to a maximum of 4 years. Investments in subsidiaries Investments in subsidiaries included as non-current assets are stated at costless any provision for impairment. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation arereviewed for impairment when events or changes in circumstances indicate thatthe carrying value may not be recoverable. An impairment loss is recognised forthe 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 lesscosts to sell. In order to assess impairment, assets are grouped into the lowestlevels for which there are separately identifiable cash flows (cash-generatingunits). Cash flows used to assess impairment are discounted using appropriaterates taking into account the cost of equity and any risks relevant to thoseassets. Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the first-in, first-out (FIFO) method. The cost of finishedgoods and work in progress comprises raw materials, direct labour, other directcosts and related production overheads (based on normal operating capacity). Net realisable value is based on the anticipated selling price less furthercosts expected to be incurred to completion and disposal. Provisions are madeagainst those inventories considered to be obsolete or excess to requirements onan item-by-item basis. There are no significant differences between balance sheet and replacement costvalues. For these purposes replacement cost is based upon latest invoice pricesbefore the balance sheet date. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less and bank overdrafts. Bank overdrafts are shown withincurrent liabilities on the balance sheet. Deferred tax Deferred tax is provided on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carrying amounts forfinancial 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 itis probable that taxable profit will be available against which the deductibletemporary differences, and the carry-forward of unused tax assets and unused taxlosses can be utilised. The carrying amount of deferred income tax assets isreviewed at each balance sheet date and reduced to the extent that it is nolonger probable that sufficient taxable profit will be available to allow all orpart of the deferred income tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that areexpected to apply to the year when the asset is realised or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date. Tax relating to itemsrecognised directly in equity are recognised in equity and not in the incomestatement. Pension costs During the year the Group operated a defined contribution money purchase pensionscheme under which it pays contributions based upon a percentage of the members'basic salary. The scheme is administered by trustees either appointed by theCompany or elected by the members (to constitute one third minimum). Contributions to defined contribution pension schemes are charged to the incomestatement according to the year in which they are payable. Share option scheme The Group operates an executive share scheme. For all grants of share optionsand awards, the fair value as at the date of grant is calculated using anappropriate option pricing model and the corresponding expense is recognisedover the vesting period. The Company has taken advantage of the transitionalprovisions of IFRS 2 'Share Based Payments' in respect of equity-settled awardsand has applied IFRS 2 only to equity settled awards granted after 7 November2002 that had not vested before 1 January 2005. Short term incentive plan (STIP) The STIP investment is carried at the cost of the shares acquired less the costof the shares vested. This investment in own shares is presented as a deductionfrom shareholders' funds. The matched element of the STIP which has a condition of employment attached toit is spread over the vesting period of the shares and recognised in the incomestatement over this period. Provisions Provisions are recognised when the Group has a present legal or constructiveobligation as a result of past events and it is more likely than not that anoutflow of resources will be required to settle the obligation and the amounthas been reliably estimated. The expense relating to any provision is presentedin the income statement net of any reimbursement. Provisions are measured at the present value of management's best estimate ofthe expenditure required to settle the present obligation at the balance sheetdate. If material, provisions are determined by discounting the expected futurecash flows of the Group at rates that reflect current market assessments of thetime value of money. Revenue recognition Revenue comprises the fair value of the sale of goods and services, net of valueadded tax, rebates and discounts and after eliminating sales within the Group.Revenue is recognised as follows: (a) Sales of goods Sales of goods are recognised when a Group entity has delivered products to thecustomer; the customer has accepted the products; and collectability of therelated receivables is reasonably assured. (b) Sales of services Sales of services are recognised in the accounting period in which the servicesare rendered, by reference to completion of the specific transaction, assessedon the basis of the actual service provided as a proportion of the totalservices to be provided. (c) Royalty income Royalty income is recognised on an accruals basis in accordance with thesubstance of the relevant agreements. (d) Sales returns The Group establishes a sales returns provision at the period end that reducesincome in anticipation of customer returns of goods sold in the period. Segmental reporting The Group's primary reporting format is geographical segments and secondaryformat is business segments. A geographical segment is a component of the Groupthat operates within a particular economic environment and is subject to risksand returns that differ from those components operating in other economicenvironments. A business segment is a component of the Group that provides agroup of related products and is subject to risks and returns that are differentfrom those of other business segments. Operating profit of each segment includes revenue and expenses directlyattributable to or can be allocated on a reasonably basis. Segment assets andliabilities are those operating assets and liabilities directly attributable toor can be allocated on a reasonable basis. Leases The Group enters into operating and finance leases. Assets held under finance leases are initially reported at the fair value of theasset with an equivalent liability categorised as appropriate under liabilitiesdue within or after one year. The assets are depreciated over the shorter of thelease term and their useful economic lives. Finance charges are allocated toaccounting periods over the period of the lease to produce a constant rate ofreturn on the outstanding balance. Rentals are apportioned between financecharges and the reduction of the liability, and allocated to net interest. Assets under operating leases are charged on a straight-line basis over thelease term. Derivative financial instruments From 1 April 2004 to 31 March 2005 In accordance with IFRS 1, 'First Time Adoption of International FinancialReporting Standards', the Group has elected not to apply IAS 32, 'FinancialInstruments: Disclosure and Presentation', and IAS 39, 'Financial Instruments:Recognition and Measurement' to the period ended 31 March 2005. The Group hascontinued to adopt UK GAAP in the accounting for and disclosure of financialinstruments in that period. The derivative instruments used by the group to manage its currency risk areforward rate contracts. Forward currency contracts entered into with respect totrading transactions were accounted for under UK GAAP as hedges, with theinstruments impact on profit not recognised until the underlying transaction wasrecognised in the profit and loss account. The notional amounts of interest rateswaps and forward currency contracts were not recorded on the balance sheet. From 1 April 2005 onwards Derivatives are initially recognised at fair value on the date a derivativecontract is entered into and are subsequently remeasured at their fair value.The Group documents at the inception of the transaction the relationship betweenhedging instruments and hedged items, as well as its risk management objectiveand strategy for undertaking various hedge transactions. The Group alsodocuments its assessment, both at hedge inception and on an ongoing basis, ofwhether the derivatives that are used in hedging transactions are highlyeffective in offsetting changes in fair values of the hedged items. (a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fairvalue hedges are recorded in the income statement, together with any changes inthe fair value of the hedged asset or liability that are attributable to thehedged risk. (b) Derivatives that do not qualify for hedge accounting Certain derivative instruments are not considered effective and do not qualifyfor hedge accounting. Such derivatives are classified as at fair value throughthe income statement, and changes in the fair value of derivative instrumentsthat do not qualify for hedge accounting are recognised immediately in theincome statement. 6. First time adoption of International Financial Reporting Standards The Group has applied IFRS 1 'First Time Adoption of International FinancialReporting Standards' for its initial implementation of IFRS. The Group's date oftransition to IFRS is 1 April 2004 and comparative information in the financialstatements has been restated to reflect the Group's adoption of IFRS exceptwhere otherwise required or permitted by IFRS 1. IFRS 1 requires an entity to comply with each IFRS effective at the reportingdate for its first financial statements prepared under IFRS. As a general rule,IFRS 1 requires such standards to be applied retrospectively. However, thestandard permits several optional exemptions from full retrospectiveapplication. The Group has elected to take advantage of the followingexemptions:- •The Group has adopted IFRS 3 'Business Combinations' to the extent that itapplies to acquisitions after 1 April 2004. Acquisitions before that date havebeen recorded under previous accounting rules as the Group has taken advantageof the exemption permitted in IFRS 1. All goodwill has been tested forimpairment in accordance with our accounting policy. •The Group has taken advantage of the exemption in IFRS 1 regarding cumulativetranslation differences. Accordingly, the cumulative translation differences forall foreign operations are deemed to be nil at the date of transition to IFRS. •The Group has applied the exemptions in IAS 32 'Financial Instruments:Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition andMeasurement', and applied these standards from 1 April 2005 only. •The Group has taken advantage of the exemptions allowed in IFRS 1 regardingIFRS 2 'Share based payments'. The Group has applied the exemptions for sharebased payments granted on or before 7 November 2002. •The Group considers the land and buildings revaluation performed under UK GAAPas comparable to the fair value at the date of the transition to IFRS.Accordingly, the Group has elected to use this valuation as deemed cost at thedate of transition to IFRS, and stated the property at valuation, net ofaccumulated depreciation. Main impacts of International Financial Reporting Standards Outlined below are those International Financial Reporting Standards which havean impact upon the financial information of Hornby Plc. Details of adjustmentsare set out in the reconciliations to UK GAAP below. IFRS 3 - 'Business Combinations' The standard deals with accounting for business combinations including goodwilland intangible assets. The Group's previous policy under UK GAAP was to amortisegoodwill, which has now ceased, and to test for impairment, normally on anannual basis, when there is an indication that the carrying value of an assetmight not be recoverable. Where appropriate, in respect of business combinationscompleted after the date of transition to IFRS, separately identified intangibleassets have been valued and are subject to amortisation. IAS 12 - 'Income Taxes' This standard requires entities to provide for deferred taxation based ontemporary differences between the carrying amount of assets and liabilities andtheir tax base. Consequently, the Group has made additional provision fordeferred taxation on tax deductible amortisation on purchased goodwill anddeferred tax adjustments in respect of share based payments. IAS 21 - 'The Effects of Changes in Foreign Exchange Rates' Income statements and cash flows of foreign subsidiaries are reported insterling using average rates of exchange that existed during the accountingperiod rather than the closing rates at the end of the accounting period as waspreviously permitted by UK GAAP. IAS 10 - 'Events after the balance sheet date' The standard does not permit dividends declared after the balance sheet date tobe recognised as a liability. Consequently, under IFRS, the Group no longermakes provision for dividends not approved by the period end. Actual dividendspaid in the period are charged to shareholders' equity. IFRS 2 - 'Share Based Payments' Previously the cost of awards to employees (including conditional rights) wascharged to the income statement over the period to which the employees'performance related. Historically, provision has been made for the cost ofawards based on the share price ruling at grant date. Under IFRS 2, share awardsare measured at fair value at grant date and recognised as an expense over thevesting period. The impact of this standard on the financial statements of theGroup is a small reduction in the charge to the income statement for the yearended 31 March 2005 and an equivalent increase in shareholders' funds, net ofdeferred tax. Additionally there is a small reduction in the cumulative chargeto retained earnings at the date of transition to IFRS. IAS 14 - 'Segment Reporting' As previously, the Group presents primary segmental reporting based on its threegeographic regions being the UK, the USA and Rest of Europe. The Group operatesas a single business segment. Reconciliation of IFRS Income Statement Year ended Year ended 31 March 31 March 2006 2005 (unaudited) (unaudited) £'000 £'000 Profit for the period under UK GAAP 5,326 5,156 Share-based payments (158) 84Amortisation of goodwill reversal 593 297Amortisation of intangible assets reversal 149 35Amortisation of intangible assets (97) (33)Financial derivatives 38 -Taxation 7 53------------------------------------------------------------------Profit for the period under IFRS 5,858 5,592================================================================== Reconciliation of profit - UK GAAP to IFRS Year ended 31 March 2005 UK GAAP Effect of IFRS IFRS (unaudited) (unaudited) (unaudited) £'000 £'000 £'000REVENUE 45,006 - 45,006Cost of sales (22,613) - (22,613)----------------------------------------------------------------------------------GROSS PROFIT 22,393 - 22,393 Distribution costs (1,312) - (1,312)Selling and marketing costs (9,508) - (9,508)Administrative expenses (4,293) 383 (3,910)Other operating income 51 - 51----------------------------------------------------------------------------------GROUP OPERATING PROFIT 7,331 383 7,714 Finance income 47 - 47Finance costs (176) - (176)----------------------------------------------------------------------------------PROFIT BEFORE TAXATION 7,202 383 7,585 Taxation (2,046) 53 (1,993)----------------------------------------------------------------------------------PROFIT FOR THE YEAR 5,156 436 5,592================================================================================== Reconciliation of Balance Sheet - UK GAAP to IFRS At 1 April 2004 At 31 March 2005 UK GAAP Effect of IFRS UK GAAP Effect of IFRS IFRS IFRS (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 £'000 £'000 £'000ASSETSNON-CURRENT ASSETSGoodwill 4,017 - 4,017 7,503 248 7,751Intangible assets - - - 1,367 51 1,418Property, plant and equipment 4,436 - 4,436 5,096 - 5,096Deferred tax assets 240 (240) - 344 (213) 131------------------------------------------------------------------------------------------------------------------------ 8,693 (240) 8,453 14,310 86 14,396------------------------------------------------------------------------------------------------------------------------CURRENT ASSETSInventories 7,369 - 7,369 7,526 - 7,526Trade and other receivables 5,977 - 5,977 7,199 - 7,199Cash and cash equivalents 5,806 - 5,806 1,860 - 1,860------------------------------------------------------------------------------------------------------------------------ 19,152 - 19,152 16,585 - 16,585------------------------------------------------------------------------------------------------------------------------LIABILITIESCURRENT LIABILITIESBorrowings - 30 30 - 23 23Trade and other payables 8,443 (1,656) 6,787 9,525 (1,888) 7,637Current tax liabilities 1,443 - 1,443 1,100 - 1,100------------------------------------------------------------------------------------------------------------------------ 9,886 (1,626) 8,260 10,625 (1,865) 8,760------------------------------------------------------------------------------------------------------------------------NET CURRENT ASSETS 9,266 1,626 10,892 5,960 1,865 7,825========================================================================================================================NON-CURRENT LIABILITIESBorrowings 103 - 103 80 - 80Deferred tax liabilities - 26 26 - - -Provisions for other liabilities and charges 527 - 527 369 - 369------------------------------------------------------------------------------------------------------------------------ 630 26 656 449 - 449------------------------------------------------------------------------------------------------------------------------NET ASSETS 17,329 1,360 18,689 19,821 1,951 21,772========================================================================================================================SHAREHOLDERS' EQUITYShare capital 370 - 370 373 - 373Share premium 4,797 - 4,797 4,906 - 4,906Other reserves 2,500 - 2,500 2,483 - 2,483Retained earnings 9,662 1,360 11,022 12,059 1,951 14,010------------------------------------------------------------------------------------------------------------------------TOTAL EQUITY 17,329 1,360 18,689 19,821 1,951 21,772 ======================================================================================================================== IFRS Adjustments At At 1 April 2004 31 March 2005 (unaudited) (unaudited) £'000 £'000 Goodwill - per UK GAAP 4,017 7,503Amortisation written back - 297Lima intangibles fair value adjustment - (49)-------------------------------------------------------------------------- 4,017 7,751-------------------------------------------------------------------------- Goodwill amortisation relating to acquisitions prior to 1 April 2004 and chargedto profit since that date have been reversed. Goodwill relating to Lima assets acquired was reduced and reallocated tointangible assets. Intangible assets - per UK GAAP - 1,367*Amortisation written back - 35Lima intangibles fair value adjustment - 49Amortisation of fair value - (33)-------------------------------------------------------------------------- - 1,418-------------------------------------------------------------------------- Intangible assets amortisation relating to acquisitions prior to 1 April 2004and charged to profit since that date have been reversed. Intangible assets relating to Lima assets acquired increased upon fair valuing. Intangible assets relating to acquisitions post 31 March 2004 are amortised overtheir useful life. * Shown in the 31 March 2005 Report and Accounts within goodwill. Deferred tax assets - per UK GAAP 240 344Accelerated capital allowances 9 63Short term incentive plan (73) (108)Share options - 29Revaluations (227) (222)Pensions 15 14Trade discount 3 3General provisions 7 8-------------------------------------------------------------------------- (26) 131--------------------------------------------------------------------------Borrowings - per UK GAAP - -Finance lease commitments < 1 year 30 23-------------------------------------------------------------------------- 30 23-------------------------------------------------------------------------- Finance lease capital commitments due in less than one year. Trade and other payables - per UK GAAP 8,443 9,525Finance lease commitments transferred to borrowings (30) (23)Dividend reversal (1,626) (1,865)-------------------------------------------------------------------------- 6,787 7,637-------------------------------------------------------------------------- Dividends accrued but not declared, proposed or approved are reversed. Retained earnings - per UK GAAP 9,662 12,059Dividend reversal 1,626 2,588Dividend payment - (723)Amortisation of goodwill reversal - 297Amortisation of intangibles reversal - 35Amortisation of intangibles fair value - (33)Deferred taxation (266) (213)-------------------------------------------------------------------------- 11,022 14,010-------------------------------------------------------------------------- There are no material differences between the cash flow statements presentedunder IFRS and the cash flow statements previously presented under UK GAAP. 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