Hornby Regulatory News (HRN)

11 Nov 2005 07:29

Hornby PLC11 November 2005 HORNBY MAKING PROGRESS WITH INTERNATIONAL SALES GROWTH Hornby Plc, ("Hornby") the international models and collectables Group, hastoday announced its interim results for the six months to 30 September 2005. Hornby's two main products in the UK are Hornby model railways and Scalextricslot car racing systems. It also operates a number of overseas subsidiariesincluding Hornby Italia in Italy and Electrotren in Spain. • Pre-tax profits in line with prior year at £2.52 million (2004: £2.59million) • Diluted earnings per share 4.48p (2004: 4.55p) • Turnover £18.5 million • Hornby Italia, ex-Lima assets performing ahead of expectations • Fernando Alonso - F1 Licence agreed in Spain • Interim dividend increased 15% to 2.3p (2004: 2.0p) Frank Martin, Chief Executive of Hornby, said, " Despite a challenging economic backdrop, we are continuing to make goodprogress. Our international subsidiaries are performing ahead of expectations.Hornby Italia, the ex-Lima business, has a detailed plan in place to re-launchthe brand. Given the potential of the re-invigorated European brands we havehigh hopes for a growth in European sales in the second half of the year.Strategically we are pleased that the group has now diversified and expanded therange of subject matter that we sell into different territories. " In the UK sales of model trains have remained robust and we have introducedseveral new locomotives which are performing well in the run up to Christmas. Weare also extending the Thomas the Tank Engine range which continues to grow inits appeal. " New licences remain the life-blood of our business. We are delighted that ourSpanish subsidiary has won the exclusive rights to use images of the new FormulaOne World Champion Fernando Alonso. His victory this year has helped to generateenormous interest in the sport in Spain. Significantly this is helping theprofile of our slot car products in Europe, and has provided a major boost toSpanish sales. " This is an exciting time - despite market challenges, the continued focus onimproving the quality of our products is paying off. Hornby products continue toappeal across a broad spectrum of ages. Despite the backdrop of a consumerslowdown in the UK, we are confident that we remain well placed to continue thelong-term progress of the Group." -ends- Date: 11 November 2005For further information contact: Hornby Plc cityPROFILEFrank Martin, Chief Executive Simon CourtenayJohn Stansfield, Finance Director Andrew HarrisTel: 01843-233500 Tel: 020-7448-3244On 11 November - Tel: 020-7448-3244 Web: www.hornby.com or: www.scalextric.com High resolution images are available for the media by contacting Andrew Harris at cityPROFILE CHAIRMAN'S REVIEW The Group continues to make excellent progress towards its objective of buildingan international Hobby business by broadening the range of brands and markets inwhich we operate. This in turn reduces our dependency on our UK operations.However, given the well-documented slowdown in UK retail spending, we have notbeen immune to the effects of a more difficult trading environment in our homemarket. Against this background total sales declined by 3% to £18.5m. Reporting for the first time under IFRS, profit before tax at £2.5m was broadlyin line with the same period last year (£2.6m). This is a pleasing result, giventhe reduction in sales and the fact that, as previously reported, the Group hascarried the costs of the Lima subsidiary during this period, prior to thebenefit of revenues from products now being manufactured in China. Dilutedearnings per share were similar to the same period last year at 4.48p (2004 -4.55p). Dividend Your Board is continuing its policy of paying one third of the previous year'sfull dividend at the half-year. Consistent with this policy, I am thereforepleased to announce a 15% increase in the interim dividend of 2.3p (2004 - 2.0p)per ordinary share, payable on 27 January 2006 for those shareholders on theregister as at 6 January 2006. Operating Review As I reported at the Annual General meeting in July we recognised that we mayface a wider economic slowdown during the current financial year. However, ourbrand position and established distribution base in the UK market mean that,whilst sales have been slower, our margins have remained strong. This, coupledwith early action to reduce overheads where possible, has enabled the Group toreport profits in line with the same period last year. Our overseas subsidiaries have all made good progress in the first half. Our Spanish subsidiary Electrotren has secured wide distribution for ourSuperslot brand, particularly as a result of securing the image rights toFormula One World Champion Fernando Alonso in relation to our slot-car productsin Spain. Some sales benefits have been felt in the first half but the bulk ofthe revenue gains will come in the second half. Scalextric USA reported an improvement in sales, and this trend is expected tocontinue in the second half. Hornby Italia, responsible for the Lima brands acquired in December 2004,reported a better result than anticipated as a result of tight overhead controland higher than forecast revenues from stock included in the Lima assetsacquired. The product development, marketing and operational infrastructurerequired for the future development of the business is now in place. Productionfrom China is now starting to arrive in Italy, and we are confident that we cancontinue to grow the Lima business substantially during the second half of thecurrent financial year and beyond. The economic case for manufacturing model railways and other hobby productsoutside the main economies of Western Europe continues to be compelling. Webelieve there will be further opportunities to leverage our experience andexpand both brand and geographic market coverage. This would further reducedependence on any one market. In addition to the encouraging developments in our overseas subsidiaries we havealso been active in ensuring that we have access to the best licences to developand promote our product ranges to the widest possible audience. The Company's net debt position of £3.4m as at 30 September 2005 has increasedby £3.1m compared to the previous year. However this position is after paymentfor the Lima assets of £6.0m. The Company therefore continues to demonstrate itsability to generate significant positive cash flow from its operations. Current Trading Against difficult market conditions in its main market, the UK, your Company hasmade a creditable start in the current financial year. However marketindications for Christmas trading in the UK are not encouraging, and I musttherefore sound a cautionary note in respect of trading in the second half.Nevertheless the actions we have already taken towards our longer term objectiveof building a profitable hobby business across Europe are now beginning to bearfruit. This leaves us better balanced to offset variations in demand inindividual markets. We are therefore confident that, notwithstanding the impactof short term pressures on trading, the benefits of the strategic direction wehave taken will have positive effects on the Group for a number of years tocome. Neil Johnson11 November 2005 GROUP INCOME STATEMENTfor the six months ended 30 September 2005 Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Revenue 18,460 18,970 45,006Cost of sales (9,043) (9,721) (22,613)-------------------------------------------------------------------------------Gross profit 9,417 9,249 22,393 Distribution costs (658) (555) (1,312)Selling and marketing costs (4,190) (4,069) (9,508)Administrative expenses (1,842) (1,942) (3,910)Other operating expenses (110) (48) 51-------------------------------------------------------------------------------Group operating profit 2,617 2,635 7,714 Finance income 17 32 47Finance costs (119) (80) (176)-------------------------------------------------------------------------------Profit before taxation 2,515 2,587 7,585Taxation (777) (818) (1,993)-------------------------------------------------------------------------------Profit for the period after taxation 1,738 1,769 5,592=============================================================================== EARNINGS PER ORDINARY SHAREBasic 4.65p 4.78p 15.06pDiluted 4.48p 4.55p 14.38p GROUP BALANCE SHEETas at 30 September 2005 30 September 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000ASSETSNON-CURRENT ASSETSGoodwill 7,719 4,017 7,751Intangible assets 1,356 - 1,418Property, plant and equipment 5,130 4,559 5,096Deferred income tax assets 205 42 131------------------------------------------------------------------------------- 14,410 8,618 14,396------------------------------------------------------------------------------- CURRENT ASSETSStocks 9,568 9,398 7,526Trade and other receivables 11,910 11,302 7,199Derivative financial instruments 13 - -Cash and cash equivalents 727 317 1,860------------------------------------------------------------------------------- 22,218 21,017 16,585-------------------------------------------------------------------------------LIABILITIESCURRENT LIABILITIESBorrowings 4,042 478 23Trade and other payables 9,181 8,562 7,637Current income tax liabilities 1,241 1,028 1,100------------------------------------------------------------------------------- 14,464 10,068 8,760------------------------------------------------------------------------------- NET CURRENT ASSETS 7,754 10,949 7,825=============================================================================== NON-CURRENT LIABILITIESBorrowings 45 92 80Provisions for other liabilities and charges 510 686 369------------------------------------------------------------------------------- 555 778 449------------------------------------------------------------------------------- NET ASSETS 21,609 18,789 21,772=============================================================================== SHAREHOLDERS' EQUITYShare capital 375 372 373Share premium 5,010 4,862 4,906Other reserves 2,475 2,492 2,483Retained earnings 13,749 11,063 14,010-------------------------------------------------------------------------------TOTAL EQUITY 21,609 18,789 21,772=============================================================================== GROUP STATEMENT OF CHANGES IN EQUITYfor the six months ended 30 September 2005 and 30 September 2004, and the yearended 31 March 2005 Capital Share Share Redemption Revaluation Other Retained Total Capital Premium Reserve Reserve Reserves Earnings* Equity (unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited) £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 April 2004 370 4,797 55 757 1,688 11,022 18,689 Profit for the period - - - - - 1,769 1,769Amortisation of revaluation surplus - - - (8) - 8 -Issue of shares 2 65 - - - - 67Share based payments - - - - - 49 49Exchange adjustment offset in reserves - - - - - 41 41Purchase of own shares - - - - - (278) (278)Shares vested - - - - - 64 64Dividends - - - - - (1,612) (1,612)--------------------------------------------------------------------------------------------------------------------Balance at 30 September 2004 372 4,862 55 749 1,688 11,063 18,789 Profit for the period - - - - - 3,823 3,823Amortisation of revaluation surplus - - - (9) - 9 -Issue of shares 1 44 - - - - 45Share based payments - - - - - (133) (133)Exchange adjustment offsetin reserves - - - - - (15) (15)Dividends - - - - - (737) (737)--------------------------------------------------------------------------------------------------------------------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 - - - - - 1,738 1,738Amortisation of revaluation surplus - - - (8) - 8 -Issue of shares 2 104 - - - - 106Share based payments - - - - - 110 110Exchange adjustment offsetin reserves - - - - - (8) (8)Purchase of own shares - - - - - (364) (364)Shares vested - - - - - 138 138Dividends - - - - - (1,845) (1,845)--------------------------------------------------------------------------------------------------------------------Balance at 30 September 2005 375 5,010 55 732 1,688 13,749 21,609==================================================================================================================== * Attributable to equity holders of the Company. GROUP CASH FLOW STATEMENTfor the six months ended 30 September 2005 Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Cash flows from operating activitiesCash (utilised in)/generated from operations (1,228) (1,609) 9,222Finance cost paid (119) (80) (176)Income tax paid (811) (1,354) (2,557)--------------------------------------------------------------------------------------Net cash (utilised in)/generatedfrom operating activities (2,158) (3,043) 6,489--------------------------------------------------------------------------------------Cash flows from investing activitiesPurchase of trade assets and related costs - - (5,971)Proceeds from sale of property, plant and equipment - 13 227Purchase of property, plant and equipment (916) (1,107) (2,220)Finance income received 17 32 47--------------------------------------------------------------------------------------Net cash utilised in investing activities (899) (1,062) (7,917)-------------------------------------------------------------------------------------- Cash flows from financing activitiesProceeds from issuance of ordinary shares 106 67 112Purchase of own shares by STIP (364) (278) (278)Finance lease capital payments (11) (16) (30)Dividends paid to Company's shareholders (1,845) (1,612) (2,349)--------------------------------------------------------------------------------------Net cash utilised in financing activities (2,114) (1,839) (2,545)-------------------------------------------------------------------------------------- Effect of exchange rate movements 43 2 27--------------------------------------------------------------------------------------Net decrease in cash and bank overdrafts (5,128) (5,942) (3,946)Cash and bank overdrafts at beginning of the period 1,860 5,806 5,806--------------------------------------------------------------------------------------Cash and bank overdrafts at end of period 3,268 (136) 1,860-------------------------------------------------------------------------------------- Cash and cash equivalents consist of:Cash and cash equivalents 727 317 1,860Bank overdrafts (3,995) (453) -----------------------------------------------------------------------------------------Cash and bank overdrafts at end of period (3,268) (136) 1,860---------------------------------------------------------------------------------------- NOTES TO THE CASH FLOW STATEMENT (a) Cash flow from operating activities Six months Six months Year ended to 30 September 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Profit for the financial period 1,738 1,769 5,592Taxation 777 818 1,993Interest payable 119 80 176Interest receivable (17) (32) (47)Amortisation of intangible assets 51 - 33Depreciation 899 927 1,850Profit on disposal of tangible fixed assets - (7) (29)Share based payments 110 49 (84)Gain on financial derivatives (13) - -Movements in provisions 141 159 (158)Changes in stocks (2,042) (2,029) 258Changes in debtors (4,610) (5,285) (1,171)Changes in creditors 1,619 1,942 809---------------------------------------------------------------------------------------Cash (utilised in)/generated from operations (1,228) (1,609) 9,222======================================================================================= (b) Analysis of net debt At 30 September 31 March Net Cash Foreign 30 September 2004 2004 Flows Exchange 2005 £'000 £'000 £'000 £'000 £'000 Cash and cash equivalents 317 1,860 (1,176) 43 727Bank overdrafts (453) - (3,995) - (3,995)--------------------------------------------------------------------------------------- (136) 1,860 (5,171) 43 (3,268) Due within on year:Finance leases (25) (23) (24) - (47)Due after one year:Finance leases (92) (80) 35 - (45)---------------------------------------------------------------------------------------Net debt (253) 1,757 (5,160) 43 (3,360)======================================================================================= GEOGRAPHICAL SEGMENT INFORMATION Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) BY ORIGIN £'000 £'000 £'000 TURNOVERUnited Kingdom 15,312 16,643 39,572United States of America 1,171 994 2,488Rest of Europe 1,977 1,333 2,946--------------------------------------------------------------------------------Group 18,460 18,970 45,006================================================================================ £'000 £'000 £'000PROFIT BEFORE TAXUnited Kingdom 2,891 2,458 7,657United States of America (50) (86) (74)Rest of Europe - operating profit (51) 346 341 - interest (275) (131) (339) (326) 215 2--------------------------------------------------------------------------------Group 2,515 2,587 7,585================================================================================ £'000 £'000 £'000NET ASSETSUnited Kingdom 18,954 16,965 18,881United States of America 170 198 192Rest of Europe 2,485 1,626 2,699--------------------------------------------------------------------------------Group 21,609 18,789 21,772================================================================================ On 15 December 2004 a newly formed subsidiary of Hornby Plc, Hornby Italias.r.l., acquired the trade and certain assets of Lima S.p.A. The results of thisacquisition are included within Rest of Europe in the table above. For the yearended 31 March 2005 turnover was £203,000 incurring a loss before tax of£289,000. BY DESTINATION £'000 £'000 £'000 TURNOVERUnited Kingdom 12,634 13,537 33,928Rest of the world 5,826 5,433 11,078--------------------------------------------------------------------------------Group 18,460 18,970 45,006================================================================================ NOTES:1. Basis of preparation The interim financial information has been prepared in accordance with theaccounting policies the Group expects to be applicable at 31 March 2006 based onthose IFRS and IFRIC interpretations issued and effective or issued and earlyadopted as at the time of preparing these statements. The IFRS standards andIFRIC interpretations that will be applicable at 31 March 2006, including thosethat will be applicable on an optional basis, are not known with certainty atthe time of preparing these interim financial statements. These figures maytherefore require amendment to change the basis of accounting or presentation ofcertain financial information, before their inclusion in the IFRS financialstatements for the year ending 31 March 2006, which will be the Group's firstfull set of IFRS financial statements. The financial statements of the Company and its subsidiaries have been preparedunder the historical cost convention, except in respect of certain financialinstruments and certain land and buildings that are included in the financialstatements at valuation. 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 that period. No financial statements willbe filed for the six months ended 30 September 2005. 3. Earnings per share The calculation of earnings per ordinary share is based on the profits aftertaxation for the period of £1,738,000 (six months ended 30 September 2004 -£1,769,000) and the weighted average number of ordinary shares in issue duringthe period of 37,360,169 (six months ended 30 September 2004 - 37,036,552). The calculation of diluted earnings per ordinary share is based on the weightedaverage number of ordinary shares in issue as adjusted to assume conversion ofall dilutive potential ordinary shares, 38,837,156 (six months ended30 September 2004 - 38,860,832). 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. Interim Statement Copies of this statement will be sent to all shareholders and are available fromthe Company's registered office. 6. International Financial Reporting Standards The interim financial information for the six months ended 30 September 2005 hasbeen prepared in accordance with International Accounting Standards ('IAS') andInternational Financial Reporting Standards ('IFRS') as adopted by the EuropeanUnion ('EU') (see note 1). References to IFRS throughout the Interim Report refer to the application ofInternational Accounting Standards and International Financial ReportingStandards. 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 interim financial information, managementhas amended certain accounting, valuation and consolidation methods applied inthe UK 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 inthis note. First time adoption of International Financial Reporting Standards The Group will apply 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 will be restated to reflect the Group's adoption of IFRS except whereotherwise 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 will elect to take advantage of the following exemptions: •The Group will adopt IFRS 3 'Business Combinations' to the extent that itapplies to acquisitions after 1 April 2004. Acquisitions before that date willbe recorded under previous accounting rules as the Group intends to takeadvantage of the exemption permitted in IFRS 1. All goodwill will be tested forimpairment in accordance with our accounting policy. In addition, the Group willtake advantage of the exemption allowed in IFRS 1 which means that IAS 21 'TheEffects of Changes in Foreign Exchange Rates' will not apply retrospectively tofair value adjustments and goodwill arising in business combinations thatoccurred before the date of transition to IFRS. •The Group will elect to take advantage of the exemption in IFRS 1 regardingcumulative translation differences. Accordingly, the cumulative translationdifferences for all foreign operations are deemed to be nil at the date oftransition to IFRS. •The Group will elect to apply the exemptions in IAS 32 'Financial Instruments:Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition andMeasurement', and will apply these standards from 1 April 2005 only. •The Group will elect to take advantage of the exemptions allowed in IFRS 1regarding IFRS 2 'Share based payments'. The Company will apply the exemptionsfor share based payments granted on or before 7 November 2002. The Company willmeet all the disclosure requirements of IFRS 2. •The Group considers the land and buildings revaluation performed under UK GAAPas comparable to the fair value at the date of the revaluation. Accordingly, theGroup has elected to use this valuation as deemed cost at the date of transitionto IFRS, and stated the property at valuation, net of accumulated depreciation. •Main impacts of International Financial Reporting Standards •Outlined below are those International Financial Reporting Standards which willhave an impact upon the financial statements of Hornby Plc. Details ofadjustments are 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 will now cease, 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 will be valued and will be 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 will make 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 Company will nolonger make provision for dividends not approved by the period end. Actualdividends paid in the period will be charged to shareholders' equity. IFRS 2 - 'Share Based Payments' Previously the cost of awards to employees (including conditional rights) 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 awardswill be measured at fair value at grant date and recognised as an expense overthe vesting period. The impact of this standard on the financial statements ofthe Group will be a small reduction in the charge to the income statement forthe year ended 31 March 2005 and an equivalent increase in shareholders' funds,net of deferred tax. Additionally there will be a small reduction in thecumulative charge to retained earnings at the date of transition to IFRS. IAS 14 - 'Segment Reporting' As previously, the Group will present segmental reporting based on its threeprimary geographic regions being the UK, the USA and Rest of Europe. Secondarysegments have not been identified. Principal Accounting Policies The principal accounting policies that the Group anticipates adopting in its 31March 2006 financial statements to be prepared under IFRS, and which have beenconsistently applied in the preparation of the Interim Report, are set outbelow. 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. Tangible fixed assets Land and buildings are shown at cost or valuation less accumulated depreciation.Assets revalued prior to the issue of FRS15 are retained at their book amountsas though they were the historical cost amounts.Depreciation is provided at rates calculated to write off the cost or valuation,less any estimated residual value, of each asset on a straight-line basis (withthe 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 Residual value is calculated on prices prevailing at the date of acquisition orrevaluation where this has taken place. 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. Intangible assets (a) GoodwillGoodwill 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 namesTrade 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 relationshipsExisting 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 developmentResearch 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. Stocks Stocks 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 stocks considered to be obsolete or excess to requirements on anitem-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 income tax Deferred income tax is provided on all temporary differences at the balancesheet date between the tax bases of assets and liabilities and their carryingamounts for financial reporting purposes. Deferred income tax assets are recognised for all deductible temporarydifferences, carry-forward of unused tax assets and unused tax losses, to theextent that it is probable that taxable profit will be available against whichthe deductible temporary differences, and the carry-forward of unused tax assetsand unused tax losses can be utilised. The carrying amount of deferred incometax assets is reviewed at each balance sheet date and reduced to the extent thatit is no longer probable that sufficient taxable profit will be available toallow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates thatare expected 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. Income 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 ofvalue-added tax, rebates and discounts and after eliminating sales within theGroup. Revenue is recognised as follows: (a) Sales of goodsSales of goods are recognised when a Group entity has delivered products to thecustomer; the customer has accepted the products; and collectibility of therelated receivables is reasonably assured. (b) Sales of servicesSales 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 incomeRoyalty income is recognised on an accruals basis in accordance with thesubstance of the relevant agreements. (d) Sales returnsThe Group establishes a sales returns provision at the period end that reducesincome in anticipation of customer returns of goods sold in the period. Leases The Group enters into operating and finance leases. Assets held under finance leases are initially reported at the fair value of theasset with an equivalent liability categorised as appropriate under creditorsdue 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 hedgeChanges 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 accountingCertain 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. Reconciliation of IFRS Income Statement Six months Six months Year ended to 30 September to 30 September 31 March 2005 2004 2005 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Profit for the period per UK GAAP 1,484 1,768 5,156 Share-based payments (110) (49) 84 Amortisation of goodwill reversal 358 1 297Amortisation of intangible reversal - - 35Amortisation of intangible assets (51) - (33)Financial derivatives 13 - - Taxation 6 49 53--------------------------------------------------------------------------------Profit for the period under IFRS 1,738 1,769 5,592================================================================================ Reconciliation of Balance Sheet - UK GAAP to IFRS At 1 April 2004 At 30 September 2004 At 31 March 2005 UK GAAP Effect of IFRS UK GAAP Effect of IFRS UK GAAP Effect of IFRS IFRS IFRS IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000ASSETSNON-CURRENT ASSETSGoodwill 4,017 - 4,017 4,016 1 4,017 7,503 248 7,751Intangible assets - - - - - - 1,367 51 1,418Property, plant and equipment 4,436 - 4,436 4,559 - 4,559 5,096 - 5,096Deferred income tax assets 240 (240) - 259 (217) 42 344 (213) 131------------------------------------------------------------------------------------------------------------------ 8,693 (240) 8,453 8,834 (216) 8,618 14,310 86 14,396------------------------------------------------------------------------------------------------------------------CURRENT ASSETSStocks 7,369 - 7,369 9,398 - 9,398 7,526 - 7,526Trade and other receivables 5,977 - 5,977 11,302 - 11,302 7,199 - 7,199Cash and cash equivalents 5,806 - 5,806 317 - 317 1,860 - 1,860------------------------------------------------------------------------------------------------------------------ 19,152 - 19,152 21,017 - 21,017 16,585 - 16,585------------------------------------------------------------------------------------------------------------------LIABILITIESCURRENT LIABILITIESBorrowings - 30 30 453 25 478 - 23 23Trade and other payables 8,443 (1,656) 6,787 9,330 (768) 8,562 9,525 (1,888) 7,637Current income tax liabilities 1,443 - 1,443 1,028 - 1,028 1,100 - 1,100------------------------------------------------------------------------------------------------------------------ 9,886 (1,626) 8,260 10,811 (743) 10,068 10,625 (1,865) 8,760------------------------------------------------------------------------------------------------------------------NET CURRENT ASSETS 9,266 1,626 10,892 10,206 743 10,949 5,960 1,865 7,825================================================================================================================== NON-CURRENT LIABILITIESBorrowings 103 - 103 92 - 92 80 - 80Deferred income tax liabilities - 26 26 - - - - - -Provisions for other liabilities and charges 527 - 527 686 - 686 369 - 369------------------------------------------------------------------------------------------------------------------ 630 26 656 778 - 778 449 - 449------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------NET ASSETS 17,329 1,360 18,689 18,262 527 18,789 19,821 1,951 21,772================================================================================================================== SHAREHOLDERS' EQUITYShare capital 370 - 370 372 - 372 373 - 373Share premium 4,797 - 4,797 4,862 - 4,862 4,906 - 4,906Other reserves 2,500 - 2,500 2,492 - 2,492 2,483 - 2,483Retained earnings 9,662 1,360 11,022 10,536 527 11,063 12,059 1,951 14,010------------------------------------------------------------------------------------------------------------------TOTAL EQUITY 17,329 1,360 18,689 18,262 527 18,789 19,821 1,951 21,772================================================================================================================== IFRS Adjustments At At At 1 April 2004 30 September 2004 31 March 2005 £'000 £'000 £'000 Goodwill - per UK GAAP 4,017 4,016 7,503Amortisation written back - 1 297Lima intangibles fair value adjustment - - (49)-------------------------------------------------------------------------------- 4,017 4,017 7,751-------------------------------------------------------------------------------- Goodwill amortisation relating to acquisitions prior to 1 April 2004 and chargedto profit since that date have been reversed.Goodwill related 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 related 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 Income tax assets - per UK GAAP 240 259 344Accelerated capital allowances 9 23 63Short term incentive plan (73) (52) (108)Share options - 12 29Revaluations (227) (225) (222)Pensions 15 15 14Trade discount 3 3 3General provisions 7 7 8-------------------------------------------------------------------------------- (26) 42 131-------------------------------------------------------------------------------- Borrowings - per UK GAAP - 453 -Finance lease commitments < 1 year 30 25 23-------------------------------------------------------------------------------- 30 478 23--------------------------------------------------------------------------------Finance lease capital commitments due in less than one year. Trade and other payables- per UK GAAP 8,443 9,330 9,525Finance lease commitments transferred toborrowings (30) (25) (23)Dividend reversal (1,626) (743) (1,865)-------------------------------------------------------------------------------- 6,787 8,562 7,637-------------------------------------------------------------------------------- Dividends accrued but not declared, proposed or approved are reversed. Retain earnings - per UK GAAP 9,662 10,536 12,059Dividend reversal 1,626 729 2,588Dividend payment - 14 (723)Amortisation of goodwill reversal - 1 297Amortisation of intangibles reversal - - 35Amortisation of intangibles fair value - - (33)Deferred taxation (266) (217) (213)-------------------------------------------------------------------------------- 11, 022 11,063 14,010-------------------------------------------------------------------------------- INDEPENDENT REVIEW REPORT TO HORNBY PLC IntroductionWe have been instructed by the Company to review the financial information forthe 6 months ended 30 September 2005 which comprises the group interim incomestatement, the group interim balance sheet at 30 September 2005, the groupinterim cash flow statement, the group statement of changes in equity for thesix months then ended and the related notes. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. Directors' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the Group willbe prepared in accordance with the accounting standards adopted for use in theEuropean Union. This interim report has been prepared in accordance with thebasis set out in note 1. The accounting policies are consistent with those that the directors intend touse in the next annual financial statements. As explained in note 1, there is,however, a possibility that the directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with accounting standards adopted for use in the European Union.The IFRS standards and IFRIC Interpretations that will be applicable and adoptedfor use in the European Union at 31 March 2006 are not known with certainty atthe time of preparing this interim financial information. Review work performedWe conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with United Kingdom Auditing Standards and thereforeprovides a lower level of assurance than an audit. Accordingly we do not expressan audit opinion on the financial information. This report, including theconclusion, has been prepared for and only for the Company for the purpose ofthe Listing Rules of the Financial Services Authority and for no other purpose.We do not, in producing this report, accept or assume responsibility for anyother purpose or to any other person to whom this report is shown or into whosehands it may come save where expressly agreed by our prior consent in writing. Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2005. PricewaterhouseCoopers LLPChartered AccountantsGatwick 11 November 2005 This information is provided by RNS The company news service from the London Stock Exchange