Last checked at 14 Mar 2008 07:01
Flying Brands Limited14 March 2008 FLYING BRANDS LIMITED Preliminary Results for the 52 weeks to 28 December 2007 14 March 2008, Jersey. Flying Brands Limited (LSE: FBDU), the multi channelretailer, today announces preliminary results for the 52 weeks ended 28 December2007. Summary • Sales increased by 9% to £46.3m (2006: £42.4m) benefiting from the full year effect of the 2006 acquisition of Greetings Direct • Like for like sales decreased by 13% • Internet sales increased by 19% to £5.9m (2006: £5.0m) • Profit before interest, tax, associates and abortive acquisition costs decreased by 4% to £5.1m (2006: £5.3m) • Actual profit before tax declined by 31% to £3.6m (2006: £5.3m) • Adjusted basic earnings per share (excluding one-off items) declined by 8% to 15.3p (2006: 16.6p) • Actual basic earnings per share, at 13.2p, were 19% below 2006 (16.2p) • Final dividend per share is proposed at 3.0p per share; full year dividend of 6.3p which is 32% down on the 2006 level • Greetings Direct business successfully launched in Australia Commenting on today's announcement, Tim Trotter, Chairman, said: "2007 has been a very difficult year for the Group, particularly the secondhalf, and this is reflected in the results. Not only did we have to contend withdeteriorating general retail market conditions but we were also beset with aseries of one off issues and a general decline in the trading performance in thesecond half of the year on all our main trading divisions. However, we aretaking steps to strengthen our core operations in gardening and gifts and thesuccess that we achieved in launching the Greetings Direct brand in Australiaindicates good profit potential from international markets going forward. We decided not to proceed with the acquisition of a privately owned homeshopping retailer at the beginning of 2008 due to general market and difficulttrading conditions and the significant costs of undertaking detailed duediligence on the target company have been accrued into the income statement for2007. We have reduced our level of dividend payment to the level of two times cover toreflect the decrease in our actual profits and in order to make allowance forthe planned investment of £2m in the business in 2008. The process of recruiting a new Chief Executive to replace Mark Dugdale, wholeaves the Group in April, is now well underway. The Board thanks Mark for hiscontribution to the Group over the last five years." Outlook The Group faces many challenges but has exciting plans for investment anddevelopment through 2008 which the Directors believe will establish a strongerbase for consistent growth in the future. The Group now needs to drive significant change in its businesses and to thisend we are investing £2m in 2008 to: • accelerate the transformation of our business from a pure catalogue retailer into becoming a multi channel operation through migrating to a new web platform in the first half of 2008 and recruiting key e-commerce skills • expand Greetings Direct into the USA • overhaul our products and customer service in both the Gifts and Garden divisions • recruit high calibre resources to drive the business forward We will continue to look for suitable acquisitions and partnerships, with thefocus on synergy, overall value and the enhancement of our multi channeloperations. The Group has made a mixed start to the current financial year. While the Gardendivision has started strongly, this has not compensated fully for a weakperformance for Flying Flowers up to Mother's Day and for Greetings Direct inthe UK as a result of lower than expected response rates to its January mailingcampaign and an increase in the attrition rate from existing customers. For further information, please contact: Flying Brands Limited 0844 884 6465Mark Dugdale, Chief ExecutiveGraham Norton, Finance Director Smithfield Consultants 020 7360 4900John KielyGeorge Hudson Notes to editors Jersey based Flying Brands Limited (LSE: FBDU) is a multi brand and multichannel home shopping specialist. Founded in 1981, it was admitted to theOfficial List of the London Stock Exchange in 1993. The Group operates thefollowing divisions: • Gifts (Flying Flowers, the UK's largest flowers by post brand, despatching nearly one million bouquets a year; Greetings Direct, the UK's only continuity greeting cards business) • Garden (Gardening Direct, one of the UK's largest mail order bedding plants and gardening products operations; Garden Bird Supplies, a leading provider of food and accessories for birds and other wildlife; Sarah Raven's Kitchen & Garden, high quality plants and general hardware that are hard to find elsewhere) • Entertainment (Listen2, the leading mail order audio books, nostalgic music, DVD and video publisher and distributor; Benham, the first day cover stamps and coins collectables specialist) More information can be found at: www.flyingbrands.com CHAIRMAN'S STATEMENT OVERVIEW AND FINANCIAL RESULTS 2007 has been a very difficult year for the Group, particularly the second half,and this is reflected in the results: not only did we have to contend withdeteriorating general retail market conditions, but we were also beset with aseries of one off issues, and a general decline in the trading performance inthe second half of the year on all our main trading divisions (a fullexplanation of these is set out below and in the Financial Review). However, weare taking steps to strengthen our core operations in gardening and gifts andthe success that we achieved in launching the Greetings Direct brand inAustralia indicates good profit potential from international markets goingforward. We continue to make progress in transforming our business from a pure catalogueretailer into becoming a multi channel operation. Overall, internet salesimproved by 19% from £5.0m in 2006 to £5.9m in 2007, with sales onlinerepresenting 13% of total revenues in 2007 compared to 12% in 2006. We aremigrating to a new web platform in the first half of 2008; this will give usmuch greater scale and flexibility over our current internet architecture and wetherefore anticipate that our presence on the web will increase considerably. We decided not to proceed with the acquisition of a significant privately ownedhome shopping retailer at the beginning of 2008 due to general market anddifficult trading conditions but we remain committed to finding appropriatebusinesses to acquire, so long as they provide demonstrable synergy with ourexisting brands and genuine additional value. The costs of undertaking detaileddue diligence on the target company have been accrued into the income statementfor 2007. Total Group sales in 2007 were £46.3m, a 9% improvement over 2006, the upliftbeing driven primarily from the full year impact of the acquisition of GreetingsDirect. On a like for like basis, sales were 13% below the 2006 result but wewill be investing in our Gifts and Garden brands in 2008 to reverse this trend. Profit before interest, taxation, associates and abortive acquisition costs was£5.1m in 2007 compared to £5.3m last year. Profit before tax was £3.6m, comparedwith £5.3m in 2006, a decline of 31%. This includes two significant one-offitems: first, the monies spent on due diligence as a result of the failedacquisition, and second, the write off of our investment in a Jersey basedinternet business called Mail Direct Limited. Cumulatively, these delivered anadverse impact on 2007 profit before tax of £1.0m. Unadjusted earnings per share were 13.2p compared with 16.2p in 2006. Adjustedearnings per share excluding the one-off items were 15.3p compared with 16.6plast year. Our operational cash flow continues to be strong and we ended the year with acash balance of £4.9m; our outstanding borrowings at the end of 2007 were £7.1m. DIVIDEND As a result of the disappointing results in 2007 and the planned investment of£2m in 2008, the Directors are recommending that the final dividend be at 3.0pper share. Together with the interim dividend of 3.3p (2006: 3.0p), the totaldividend payment per share will be 6.3p, a 32% decrease for the year. Dividendcover is 2.1. The final dividend will be paid on 1 May 2008 to shareholders whoare on the register as at 4 April 2008, with the shares going ex dividend on 2April 2008. It is the intention of the Directors to maintain a dividend policyof two times cover. OUTLOOK Despite the difficulties experienced during the latter half of 2007, the Grouphas exciting plans for investment and development throughout 2008 which theDirectors believe will establish a stronger base for consistent growth in thefuture. Central to this is an acceleration of our activities online and inother digital channels such as TV home shopping; we also recognise that we needto strengthen our overall product portfolio, particularly on Flying Flowers andGardening Direct, so that our brands have appeal to a wider, internet literateaudience. The success that Greetings Direct enjoyed at its launch in Australia last Augustmeans that we are looking to capitalise on this in 2008, with Australiacontributing healthy profits. The business model has now been proven ininternational markets, giving us confidence to extend Greetings Direct's tradingactivities to North America, with the first campaign planned for June. The plans that we have are ambitious and need the right level of expertise andresource to deliver them, and we are strengthening our divisional and E-commerceteams so that the highest standards of product development, sourcing, marketing,fulfilment and customer service are constantly being driven forward. We will maintain our strategy of growth through acquisition, with the focus onsynergy, overall value and earnings enhancement, and will continue to look forappropriate partnerships similar to the one we achieved in 2007 with the SarahRaven relationship. The objectives for 2008 are to see the original brands restored to a growthpattern, to accelerate internet sales as a result of smarter marketing on ournew platform and to capitalise on the international potential of GreetingsDirect. The underlying strength of the Group gives the Board confidence that wecan deliver these objectives and drive sales and profits forward in the secondhalf of 2008 and 2009. The Group has made a mixed start to the current financial year. While the Gardendivision has started strongly, this has not compensated fully for a weakperformance for Flying Flowers up to Mother's Day and for Greetings Direct inthe UK as a result of lower than expected response rates to its January mailingcampaign and an increase in the attrition rate from existing customers. Despite the challenges we face, the Group still has robust fundamentals: strongcash generation from operations, good profit margins within our market sector, astable of complementary businesses and tax benefits of being a Jersey basedoperation. BOARD AND STAFF The staff of Flying Brands have shown great loyalty and resilience over the lastyear, and the Board and shareholders owe them a vote of gratitude: the successof the Group is down to the creativity and dedication of our people and we arelucky to have the staff that we do. There have been some changes to the Board over the last twelve months: wewelcomed John Henwood (senior independent director) and Gerald Voisin, bothdistinguished businessmen and Jersey residents, as independent Non-ExecutiveDirectors during 2007. More recently, Jim McMahon has resigned as aNon-Executive Director and has been replaced by Stephen Cook; Mark Dugdale, theGroup Chief Executive since 2002, has decided to take up another opportunity andwill leave Flying Brands in April. We thank Mark for his contribution to a muchchanged business over the last five years. The Board is currently searching fora suitable new Chief Executive to drive forward the Group's strategy in theexciting years that lie ahead. Tim TrotterChairman14 March 2008 BUSINESS REVIEW OPERATING RESULTS FOR THE PERIOD 2007 2006 Gifts Garden Entertainment Total Gifts Garden Entertainment Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 22,414 17,092 6,760 46,266 16,395 17,913 8,060 42,368 Contribution * 4,477 4,573 2,378 11,428 4,760 4,667 2,179 11,606 Operational Overheads (2,280) (1,754) (1,696) (5,730) (1,621) (1,673) (1,763) (5,057) Corporate Overheads (386) (440) (85) (911) (265) (318) (120) (703) Amortisation on acquisitionintangibles (107) (154) (31) (292) (134) (199) (58) (391) VAT reclaim - 588 - 588 - - - - Restructuring Costs ** (254) (95) (22) (371) (32) (111) (15) (158) Profit on disposal of building 173 138 32 343 - - - - Profit before interest, taxation,associates andabortive acquisitioncosts 1,623 2,856 576 5,055 2,708 2,366 223 5,297 Loss on associates (42) (68) Write-off of associate investment (243) - Abortive acquisition costs (749) - Profit before interest and taxation 4,021 5,229 Interest (405) 40 Profit before taxation 3,616 5,269 * The directors manage each division at a contribution level and believe this isa more meaningful measurement than gross profit. ** Restructuring costs are the £256,000 (note 8) and the £115,000 loss on saleof assets due to the sale of building (note 8). OVERVIEW The second half of 2007 saw a disparate set of adverse circumstances converge onthe Group. We had to contend with appalling weather in August undermining ourGardening Direct autumn campaign which had been on track up to that point; ourinvestment in a small internet business failed, leading to a one-off write offof costs; we were seriously impeded by September and October's national postalstrike which led to loss of customer confidence and high wastage levels on bothFlying Flowers and Gardening Direct; and we decided not to proceed with aproposed major acquisition but, having done most of the work, we had incurredmost of the costs associated with due diligence as well, so these too have hadto be written off. In addition, the successful launch of Greetings Direct inAustralia led to a higher write off of costs in 2007: fortunately, this willresult in improved profits in 2008 from a larger base of customers. Despite this, there were some positive actions that occurred in the second halfof last year: as reported at our interim results announcement, we sold ourproperty, Kelvedon Park (completed in October) which not only brought £4.4m cashinto the business, but will also lead to annual ongoing savings as we streamlineour operations in leased premises in the middle of Chelmsford. We launchedGreetings Direct in Australia from August with an outstanding initial responserate to the greeting card offer which will mean increased profits in 2008. Wesecured a substantial one-off VAT rebate relating to foodstuffs sold throughGarden Bird Supplies. Our internet sales across the business continued to grow,with a higher percentage of overall new customers recruited coming from the webthan in 2006. We will take the opportunity in 2008 to invest in several key aspects of ourbusiness - the internet, product development, international expansion andstrengthening our resources - to ensure that we have the solid foundations inplace to drive our strategy to deliver maximum value to our shareholders goingforward. STRATEGIC FOCUS AND OPPORTUNITIES Flying Brands will continue to expand as a multi channel retailer targeting theover 45's market, focusing initially on the gifts and garden areas but we shallseek to expand the product base to encourage our existing customers to spendmore with us and to attract new customers predominantly from the internet. Wehave the following key objectives: • Improving the appeal and quality of the product offering • Strengthening the awareness and appeal of our brands • Rapidly developing a stronger online presence so that the internet becomes the principal sales channel over time • Establishing a presence in other channels and methods of distribution, including newspaper and magazine reader offers and digital TV shopping channels • Capitalising on the international expansion opportunities offered by Greetings Direct • Finding appropriate acquisitions that add genuine synergy • Creating partnerships in new product or service areas that add real value • Reducing our overall reliance on the low value consignment relief ("LVCR") VAT exemption that we enjoy being a Jersey business • Improving all aspects of our customer transactions, communication and service • Enhancing our systems, infrastructure and logistics • Creating the right structure and establishing the highest quality staff to drive the business The Board has decided to invest up to £2 million through 2008 to ensure that thedelivery of these objectives is accelerated. We firmly believe that the Groupwill emerge with stronger foundations and in a much better position to deliverconsistent growth and rising profits in future years as a result of theseactions. BUSINESS CHALLENGES We continue to find recruiting new customers cost effectively from ourtraditional routes to market of advertising in external printed mediaincreasingly challenging. This is principally due to a combination of decliningmedia circulations (and a failure of media costs to reduce in line with thisdecline) and market saturation from our more mature brands (response rates toour advertisements contain an increasing proportion of existing rather thangenuinely new customers). We have achieved considerable success in reactivatingold ("dormant") customers over the last few years but this has become moredifficult recently as the more obvious opportunities have been graduallyexhausted. Despite the challenges of recruitment, our database management and branddevelopment skills have enabled us to persuade our existing customers to ordermore frequently from us and also to spend more when they buy (with an increasein the average number of products purchased per order), meaning that a declinein database customers is being offset by higher sales from the customers thatremain. However, to return to consistent growth, we recognise that we need tofind new channels to recruit new customers, which is why internet transition anddevelopment is so important for us. Although there is little to suggest that the benefits we derive from low valueconsignment relief (exemption from VAT on all products shipped into the UK fromJersey that are priced at £18 or below) are currently being challenged by eitherthe UK Treasury or any other department within the overall EU, its reduction oreven abolition will always remain a threat to our business. The £18 de minimis"ceiling" has remained the same since the 1980's, which means that our scope forincreasing the prices of our products or attempting to pass on rising costs inpart to our customers, is limited, and implies that the LVCR benefit is actuallybeing eroded over time as costs, especially distribution fees from Jersey Post,increase. Thus it is becoming increasingly important for us to build profitableactivities that do not rely so much on the benefit of LVCR. As mentioned above, we have been subjected, since 2002, to double digit annualincreases in the cost of shipping products from our distribution centre inJersey to the customer's point of delivery in the UK as a result of Royal Mailrenegotiating its contract with Jersey Post. In 2007, the increase effectivelyreduced our profits by over £700K; for 2008, this cost inflation is expected toreduce our profits by approximately £500K. We have no alternative courieroption in Jersey at this time and we anticipate at least one more large increasein 2009. We have lobbied the Jersey postal regulator as well as the Jerseyminister responsible for postal affairs, so far to no positive avail, and wewill continue this process. We have increased our retail prices where we can,whilst ensuring that we continue to offer our customers not just excellent valuefor money, but excellent service as well. OTHER ACTIVITIES Towards the end of 2006, we took a 40% stake in a Jersey start up businesscalled Mail Direct Limited which trades as taxfreeshopping.com. The intentionwas to learn about running and developing internet businesses for translation toour core brands, as well as driving a return on our investment throughleveraging the delivery of low priced goods from Jersey. The website is set upas a modular shopping emporium across several different product categories,providing cross selling opportunities. Unfortunately, the most popular points of entry to the site were the music CDand film DVD areas - categories that have become extremely price sensitive andcompetitive - in which we were unable to compete effectively on price withoutdestroying our margin. We have, therefore, taken the decision to terminate ourinvolvement with this business and write off the investment of £0.2m. INFRASTRUCTURE AND OVERHEADS Total operational overheads were £5.7m in 2007, a 13% increase over 2006. Costsin Jersey and general increases in fuel and utilities remained inflationary, andwe incurred some one-off costs relating to the integration of Greetings Direct,although this will deliver savings from 2008 onwards. The sale of Kelvedon Parkand move to Chelmsford was self financing, and after reorganisation costsactually delivered a small profit. We are committed to running our business as efficiently and cost effectively aswe possibly can, as our record over the last five years clearly demonstrates. ONGOING STRENGTHS Although 2007 was a very difficult year for the Group, many positives emergedwhich are being built upon for the future and which will continue to improveoverall shareholder value. We have been able to find cost efficiencies withoutcompromising our product quality or customer service and we have found newroutes to market which will drive growth in the future. It is worth remembering that the Group has many strengths: • A stable of complementary businesses • Relatively low fixed overheads • An increasing online presence with a new web platform for 2008 • A substantial database of active trading customers, both on and off line • The tax benefits of being a Jersey based operation • Strong profit margins within our market sector • Good operational cash flow 2008 will see substantial investment in the business that should help to delivera consistent growth path in subsequent years. This is my last commentary as I am leaving the Group in April. I have beenhonoured to have been this Group's Chief Executive, and I would like to thank mycolleagues, fellow directors and all shareholders for their support over thelast five and a half years. I wish the Group every success: the forwardstrategy is both clear and is the right one, whilst the overall strengths of theGroup will facilitate its delivery. Mark DugdaleChief Executive14 March 2008 GIFTS Sales increased by 37% to £22.4m in 2007, compared with £16.4m in 2006, mainlydriven by a full year performance from Greetings Direct: excluding GreetingsDirect, sales were 5% behind the previous year. Profit before tax, interest,associate and abortive acquisition costs was £1.6m, compared to £2.7m in 2006;the issues surrounding this performance are discussed below and in the FinancialReview. Flying Flowers After a good performance in 2006, the brand encountered considerable challengesin 2007, principally from increasing external competition and margin erosion asa result of escalating costs. We were also seriously affected by the Royal Mailnational strike in the autumn which gave us no room for manoeuvre. Consumerconfidence was eroded initially by the unreliable delivery of our cataloguepromotions and then from our inability to deliver the ordered gifts to ourcustomers' recipients. This led to a high wastage of flower stems, andundoubtedly, confidence in the service had not been fully restored by Christmas,where response rates were slightly disappointing. Our standard flower bouquetsoffer customers tremendous value and probably make the delivery of flowersfinancially viable for a much wider market but we are reliant on an efficientand first class delivery service from both Jersey Post and Royal Mail. We havebeen assured that the issues leading to the strike have been resolved and that abetter service should be forthcoming. The brand continues to make good progress in improving its online sales, movingto £3.0m in 2007 compared with £2.5m last year, an improvement of 20%, which interms of overall sales represents 24% in 2007 compared to 19% the previous year.We saw the introduction of a new web platform, supplied by Demandware in theUSA, in time for Valentine's Day this year. This platform provides us withscalability and flexibility and will enable us to achieve a consistently higherranking on the key search engines, thereby driving more footfall to the websiteand hence delivering more new customers to the database. New customers from theweb increased to 42% of the total in 2007, up from 30% in 2006 and we expectthis number to increase further in 2008. Emailings are playing a more importantrole in our overall promotional mix, and we saw the number of email addresses onthe Flying Flowers' database move from 143,000 at the end of 2006 to 164,000 inDecember 2007. Recruitment of new customers remained difficult, as the dominant High Streetbrands monopolised media advertising over Valentine's and Mother's Day, and withseveral competitors now attacking the previously uncluttered Christmas market.However, our opportunity lies in developing new channels: apart from theinternet, we achieved considerable success from reader offers in national mediaand also delivered a promising test for Christmas on a TV home shopping channel.We will build on all of these opportunities in 2008, as well as looking forpartnerships where we can offer the Flying Flowers service to other companieswith large home shopping databases. A rise in stem costs from Columbia, increasing freight charges and a significanthike in delivery prices from Jersey Post dented margins in 2007: we have beenable to increase retail prices on some key product lines but we are slightlywary about undermining the value proposition to our customers. We are currentlyreviewing our flower stem supplier base and also our sourcing options which wehope will go some way to restoring gross margins in 2008. Flying Flowers has strong brand recognition and can undoubtedly be expanded asan online proposition, but it needs a slightly different emphasis in terms ofits products and their presentation: we are addressing this urgently and we areconfident that the brand is well placed for growth in 2008. Greetings Direct Greetings Direct is the only one of our brands that sends product out on anapproval basis - in other words, the customer receives the product before payingfor it; thus two key metrics in assessing performance are the number ofcustomers that have paid (and who would then receive a further product in thesubsequent month) and those that have not paid who either return the product orwho keep it without paying, moving towards a bad debt status. We monitor thisperformance continually, taking corrective action where necessary. Following the acquisition of this business in September 2006, we spent 2007integrating all of its back-end functions - processing system, order taking andcustomer service as well as packing and despatch - in house both in Essex andJersey. These functions were previously managed by a series of outsourced thirdparties. Not only will this give us greater control over the business, it willalso deliver substantial savings on an ongoing basis from 2008. The brand delivered a mixed trading performance in 2007: the key metricsdeclined in both the UK and Eire markets, but saw excellent response levels tothe launch in Australia. We are, therefore seeking to accelerate the development of new products topromote through the continuity business model to revitalise both the UK andEire: this process started last year with the launch of a gift wrapping packagecalled All Wrapped Up. The launch in Australia delivered nearly 50,000 new customers. We now have anestablished office in Sydney although marketing and product sourcing are handledfrom the UK. The total investment in Australia in 2007 was £0.5m. TheAustralian success has convinced us that we should enter the North Americanmarkets in mid 2008. To that end, we have recruited an experienced continuitymarketer, with over twenty years of experience in the USA working for companieslike Reader's Digest and Time Life. He will research the US card market,conduct an effective launch and recruit the appropriate establishment, to ensurethat our chances of success in this key market are maximised. The founder and Managing Director of Greetings Direct is leaving the business inthe first quarter of 2008 and he has been replaced by another continuitymarketing expert who will drive through new product development in the UK, buildon the success in international markets, and also develop a digital marketingstrategy for this business. One of the principal reasons for the acquisition ofGreetings Direct was its potential for geographical expansion and we aredelighted that this has been demonstrated and is being driven forward. GARDEN Sales in the Garden Division were £17.1m, a 5% decline over the £17.9m deliveredin 2006. Excluding Sarah Raven's Kitchen and Garden which only came on streamin February 2007, sales would have been 10% below the 2006 level. Profit beforetax, interest, associate and abortive acquisition costs was £2.9m, 21% ahead ofthe £2.4m achieved in 2006, although this does include £0.6m of contributionfrom a VAT rebate relating to prior years. Gardening Direct Apart from an abysmal August, Gardening Direct actually had a reasonable year,with profits from the Spring campaign ahead of 2006, and Autumn sales, excludingAugust, in line. Given that the brand had to endure a 22% increase indistribution costs from the beginning of the year and was finding new customerrecruitment particularly difficult, this could be seen as a good performance indifficult circumstances. However, August demonstrated how volatile the businesscan be and its vulnerability to external factors with the poor weather causingthe second half performance for the brand to be disappointing. Although our internet sales grew to £1.3m, an 8% increase over 2006, nowrepresenting 11% of total sales compared to 9% in the prior year, we know thatwe can improve this ratio. We move to the Demandware platform in March and seeit as a great opportunity to turn Gardening Direct into a destination websitefor the committed and knowledgeable gardener. We were able to pass on some of the cost increases on to our customers byraising the prices of some key lines as well as introducing postage and packingcharges for the first time. Whilst this appears to have had a minimal negativeimpact on our database response, it may have made us less competitive whentrying to recruit new customers through external media. Whilst we have increased significantly the number of products that we haveoffered over the last three years, we recognise that we also need to get furtherahead of the field in terms of innovative and unique varieties of plants. Thiswill give the brand a more distinctive point of view, appealing to a widerfranchise of potential customers. We will also improve our delivery service toour customers through more rigorous operational controls so that customerretention should improve. Garden Bird Supplies This brand adopts a premium position in its marketplace, backed up by a loyaland committed group of customers. The products that we offer are, we believe,demonstrably better than anything provided by our competitors, either direct orfrom the High Street, and we are able to command higher price points as aresult: our customers care passionately about their garden birds and areprepared to buy the best for them. Garden Bird Supplies performed well in 2007, despite a slow start to the year asa result of the mild winter, but sales picked up through the spring as a strongfledgling population required nurturing. New customer recruitment was sustainedas a result of some strong reader offer promotions towards the end of the year. This is a fairly internet literate brand, with web sales representing 23% of thetotal, excluding the VAT rebate, in 2007, a 15% increase over 2006 where websales were at 19%. We anticipate a further improvement when the platformswitches to Demandware in May. The brand benefited from a one off VAT rebate of £0.6m in 2007, relating to thetax treatment of foods going back to 2004. Pressures on the rising cost of most foodstuffs has meant that we have also hadto increase our retail prices from the start of this year to maintain margins,but, within reason, we believe that pricing for this brand should be fairlyelastic. The plan for 2008 is to drive growth through new customer recruitment from boththe internet and reader offers. There is also an opportunity to develop salesshows for TV shopping channels. Sarah Raven's Kitchen and Garden We licensed this business as a virtual start up in February 2007, utilising theauthority, knowledge and reputation of the eponymous author and presenter. Thebusiness came with a small database of active customers whose response rateswere lower but average order value higher than we anticipated. We pay SarahRaven a variable rate of commission once the operation reaches break even. The benefits of this business are access to a more upmarket, affluent customerbase that is fully conversant with online trading (38% of sales came from theweb in 2007), and an opportunity to access a different type of plant productthrough Sarah's knowledge and growing skills. The downside is that the businessdoes not quite fit our model and therefore takes up resource. We are recruitingnew customers cost effectively, however, and we should turn a profit in 2008. ENTERTAINMENT Overall sales for the division in 2007 were £6.8m, a decline of 16% over 2006(£8.1m), with profit before tax, interest, associate and abortive acquisitioncosts of £0.6m, an improvement of 158% against the £0.2m delivered in 2006. Listen2 The amalgamation of the audio books business Listen2Books and the nostalgiamusic brand Silverminds Direct has been successful. Although sales were downagainst the brands trading as separate entities in 2006 (partly because wemissed the important January trading period as we had to clear stock), thesaving in promotion costs and other efficiencies has driven profits forward. We have also managed to persuade suppliers to cut the price of audio CDscompared to the price of cassettes so that we could reduce the price of CDs,with the result that customers are now buying CDs in a much higher percentagethan previously. This means that the phasing out of the cassette as a formatwill now have little impact on our business. The database performed extremely well through 2007. A stream of new andexclusive product introductions kept response rates high, and we were able topersuade more previous audio only buyers to take music collections and viceversa for music only buyers. However, we were unable to translate this successinto new customer recruitment channels; whilst we thought we had found a fewmedia "winners", nothing was sustainable cost effectively. Internet sales were 10% of the total, up from 9% for the combined brands in2006. We must enhance this level in 2007 - the web has to offer the bestrecruitment opportunity for this brand. Benham In a similar performance to 2006, Benham was able to improve its overallprofitability without the benefit of promoting any significant product winners,continuing evidence that the business is tightly controlled for profits andcash, with the processes in place that allows management to focus on creativeways of driving the business forward. Trade sales are becoming increasingly important to Benham: this has the doublebenefit of clearing stock as well as providing an alternative route to market. There is no doubt that this brand should be driving higher sales from the web,and this is a priority in 2008. Financial Review Results The Group's profit after tax was £3.3m, after absorbing £0.7m of abortiveacquisition costs compared with a post tax profit of £4.0m in 2006. There weremany one-off items, both positive and negative, within the 2007 results but theGifts division encountered significant challenges in 2007 that also adverselyimpacted its and the Group's profitability. The one-off items were: • VAT refund going back to 2004 related to Garden Bird Supplies of £0.6m • the loss and write-off on a 40% investment in an Internet start up business in Jersey of £0.3m • profit on the sale of a UK freehold building £0.3m • restructuring costs related to the relocation of various activities into our new UK Head Office in Chelmsford of £0.4m • the abortive acquisition costs related to a failed attempt to acquire a significant privately owned home shopping company of £0.7m • the Royal Mail strike, which we believe adversely impacted profits by £0.4m Collectively these one-off items reduced Group profits before tax by £0.9m, to£3.6m compared with £5.3m in 2006. The impact of taking on debt in September 2006 to assist in the acquisition ofGreetings Direct has adversely impacted our interest position by £0.4m. Profitbefore tax, interest, associate and abortive acquisition costs for 2007 was£5.1m compared with £5.3m in 2006. The Gifts division saw its profit before tax, interest, associate and abortiveacquisition costs reduce from £2.7m in 2006 to £1.6m in 2007. Greetings Directprofit before tax was £0.4m after incurring £0.5m of set up costs and losses inthe second half of 2007 as we successfully rolled out our greeting cards productand business model into Australia. Flying Flowers saw its profits reduce by£0.8m (from £2.0m to £1.2m) as a result of increasing external competition,margin erosion due to escalating costs of postage from Jersey, increase in thecost of flower stems and the impact of soaring freight charges from overseas. The Garden division profit before tax, interest, associate and abortiveacquisition costs increased to £2.9m in 2007 compared with £2.4m in 2006, withthe growth coming predominantly from the one-off VAT reclaim of £0.6m relatingto prior years. The Entertainment division profit before tax, interest, associate and abortiveacquisition costs increased from £0.2m to £0.6m, through a more profitablerecruitment strategy at Listen2 and improved business to business sales ofBenham stock. The 2007 Group operational overheads were £5.7m, which has grown by £0.7m over2006. The growth in overheads was due to the full year impact of the cost baseof the acquired Greetings Direct business in late 2006 and inflationary costpressures. Corporate overheads were £0.9m compared with £0.7m in 2006. These costs comprisethe cost of the Chief Executive, the Finance Director, the Non-ExecutiveDirectors, cost of options and the legal, professional and other fees connectedwith the running of a public company. The growth in overheads has been derivedthrough having more Non-Executives in 2007 as well as higher third partyprofessional fees related to having a larger group and having to implementvarious restructuring changes. The Group paid net interest in the year of £0.4m, as a result of investingsurplus cash on acquisitions and taking out a £9.5m loan to finance theacquisition of the Greetings Direct business in September 2006. Cash flow The Group generated £5.9m of cash from trading operations (2006: £4.6m). Thenet cash generated in the year after tax, dividends and all investmentactivities was £2.9m compared with a cash outflow of £2.2m in 2006. The 2007cash was improved through the sale of a UK property for £4.4m but this wasoffset by higher capital expenditure in 2007 of £0.9m and the full year impactof the debt repayments of £1.4m. The cash balance at 28 December 2007 was £4.9mcompared with £2.0m in 2006. Financial summary 2003* 2004 2005 2006 2007 £'000 £'000 £'000 £'000 £'000 Profit after taxation 4,405 4,440 4,213 4,013 3,282 Dividends 2,010 2,067 2,195 2,239 2,388 Net (debts)/funds 3,920 6,022 4,196 (7,041) (2,253) * The results for 2003 were prepared under UK GAAP. Dividend per share The Group made dividend payments of £2.4m in 2007, and is proposing a finaldividend of £0.7m to be payable in May 2008. The combined interim and finaldividend results in a full year dividend per share of 6.3p which is a 32%decrease over 2006. The dividend cover is 2.1 times. Earnings per share The Group reported basic earnings per share of 13.2p in 2007 as compared with16.2p in 2006. The diluted EPS has also reduced to 13.1p from 15.9p in 2006. Treasury policy Historically there has been little currency risk in the Group. There are minimalpurchases made overseas, no currency hedging was done this year and nosignificant currency losses arose. In 2008 as we roll out into Australia andinto North America, this policy will be reviewed. The cash profile of the Group is very seasonal. The Group took out two bankloans in 2006 repayable over 5 years, totalling £9.5m, to help partially financethe acquisition of the Greetings Direct business. Prior to the acquisition,surplus cash was placed on deposit. As a result of the loans, the net cashindebtedness was £2.3m (2006: £7.0m). The Group increased its cash positionduring the year with the sale of a freehold property worth net proceeds of£4.4m. The Board has reduced the Group's risk to interest rate rises by having£5m of the loan on a fixed rate of 5.27% for 5 years. The loans are secured onthe remaining freehold properties. In addition, the Group has a £0.5m overdraftfacility. Taxation The Group pays taxation both in Jersey and the UK depending on the domicile ofits respective subsidiaries. The taxation charge for 2007 is £0.3m which equatesto an effective tax rate of 9% (compared with 24% in 2006). The decrease in theeffective rate was primarily as a result of the successful claims in respect ofprior years and corporation tax in Jersey now being 10% compared with 20% in2006. Taxable profits earned in Jersey will be taxed at 10% in 2008 and at a nil ratein 2009. Graham NortonFinance Director14 March 2008 Group Income Statement 52 weeks ending 28 December 2007 Footnote: i) The income statement relates to continuing operations Notes 2007 52 weeks ended 29 December 2006 Revenue 1.15 46,266 42,368Cost of Sales (33,634) (30,466) Gross profit 12,632 11,902Operating Expenses- other operating expenses 5 (7,577) (6,605)- abortive acquisition costs 6 (749) - (8,326) (6,605)Loss from associates (42) (68)Write-off of associate investment (243) - Operating profit 8 4,021 5,229Finance Expense 7 (539) (135)Finance Income 7 134 175 Profit before tax 3,616 5,269Taxation 10 (334) (1,256) Profit for the period attributable to equity holders of the parent 3,282 4,013 Earnings per Share expressed in pence per 13shareBasic 13.20p 16.16pDiluted 13.14p 15.88p * The income statement relates to continuing operations. Balance Sheetas at 28 December 2007 Group Group Company Company 29 December 29 December 2007 2006 2007 2006 notes £'000 £'000 £'000 £'000 AssetsNon-current assetsGoodwill 14 15,463 15,968 - -Intangible assets 14 725 1,017 - -Property, plant and equipment 6,382 10,347 - -Interest in associates - 132 - -Loans to associates - 33 - -Investments - - 21,363 21,363Deferred Tax 283 137 - - 22,853 27,634 21,363 21,363 Current assetsInventories 4,091 3,703 - -Loans to associates - 67 - -Trade and other receivables, net ofimpairment 1,858 1,866 220 245Prepayments 1,808 727 - -Cash and cash equivalents 4,872 1,984 1,489 - 12,629 8,347 1,709 245 LiabilitiesCurrent LiabilitiesCurrent income tax liabilities (596) (854) - -Bank loans and overdrafts 15 (1,900) (1,900) - (1,511)Trade payables (6,781) (4,049) - -Accruals and other payables (1,329) (2,678) (15) (55) (10,606) (9,481) (15) (1,566) Net current (liabilities)/assets 2,023 (1,134) 1,694 (1,321)Non-current liabilitiesBank Loans 15 (5,225) (7,125) - -Income tax liabilities (346) (1,018) - - (5,571) (8,143) - - Net assets 19,305 18,357 23,057 20,042 Shareholders' equityOrdinary shares 254 254 253 253Share premium 16,178 16,138 16,178 16,138Capital reserve (17) (17) 670 670Capital redemption reserve 22 22 22 22Foreign exchange reserve (24) - - -Retained earnings 2,892 1,960 5,934 2,959Total equity attributable to equity holders of the parent 19,305 18,357 23,057 20,042 Statements of Changes in Shareholders' Equity for the 52 weeks ended 28 December 2007 The Group Total Capital Foreign attributable Share Share Capital Redemption Exchange Retained to equity Capital Premium Reserve Reserve Reserve Earnings holders notes £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 30 December 2005 255 16,021 (17) 20 - 355 16,634 Profit for the period - - - - - 4,013 4,013 Employee share option scheme 1.14 - - - - - 78 78 Dividend paid 12 - - - - - (2,239) (2,239) Sale of own shares in ESOP - - - - - 100 100 Issue of shares 1 117 - - - - 118 Cancellation of shares (2) - - 2 - (347) (347) Balance at 29 December 2006 254 16,138 (17) 22 - 1,960 18,357 Balance at 29 December 2006 254 16,138 (17) 22 - 1,960 18,357 Profit for the period - - - - - 3,282 3,282 Employee share option scheme 1.14 - - - - - 38 38 Dividend paid 12 - - - - - (2,388) (2,388) Exchange loss - - - - (24) - (24) Issue of shares - 40 - - - - 40 Balance at 28 December 2007 254 16,178 (17) 22 (24) 2,892 19,305 The Company Total Total Capital Foreign attributable Share Share Capital Redemption Exchange Retained to equity Capital Premium Reserve Reserve Reserve Earnings holders notes £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 30 December 2005 254 16,021 670 20 - 5,299 22,264 Profit for the period 11 - - - - - 49 49 Dividend paid - - - - - (2,142) (2,142) Sale of own shares in ESOP - - - - - 100 100 Issue of shares 1 117 - - - - 118 Cancellation of shares (2) - - 2 - (347) (347) Balance at 29 December 2006 253 16,138 670 22 - 2,959 20,042 Balance at 29 December 2006 253 16,138 670 22 - 2,959 20,042 Profit for the period 11 - - - - - 5,274 5,274 Dividend paid - - - - - (2,299) (2,299) Issue of shares - 40 - - - - 40 Balance at 28 December 2007 253 16,178 670 22 - 5,934 23,057 Cash flow statements For the 52 weeks ended 28 December 2007 Group Group Company Company 2007 2006 2007 2006 notes £'000 £'000 £'000 £'000 Profit for the period 3,282 4,013 5,274 49Adjustment forProfit less losses on sale of property, plant and equipment (226) (1) - -Taxation 10 334 1,256 - -Depreciation 8 1,059 1,400 - -Amortisation 8 292 391 - -Unrealised exchange gains (24) - - -Increase in inventories (388) (412) - -(Increase)/decrease in receivables (1,049) 319 (65) 5,000Increase/(decrease) in payables 1,872 (2,499) (40) (12)Net finance expenditure/(income) 7 405 (40) - 41Share based payments 38 78 - -Write-off of associate investment 243 - - -Loss for associate 42 68 - - Cash generated from operations 5,880 4,573 5,169 5,078Interest received 110 175 - 18Interest paid (523) (135) - (98)Tax paid (1,410) (1,531) - - Net cash from operating activities 4,057 3,082 5,169 4,998Cash flows from investing activitiesAcquisition of subsidiaries (net of cash acquired) - (11,303) - -Acquisition of investment in associates - (200) - -Purchase of customer list 14 - (10) - -Purchase of property, plant and equipment (1,306) (378) - -Proceeds from sale of property, plant and equipment 4,438 40 - -Repayment of loan to subsidiary - - - (140)Repayment of loan from subsidiary - - 90 96Loan to associates (53) (100) - - Net cash from/(used) in investing activities 3,079 (11,951) 90 (44)Cash flow from financing activitiesNet proceeds from issue of ordinary share capital 40 118 40 118New loans raised - 9,500 - -Repayment of borrowings (1,900) (475) - -Purchase of own shares for cancellation - (347) - (347)Sale of treasury shares - 100 - 100Dividends paid to shareholders 12 (2,388) (2,239) (2,299) (2,142) Net cash used in financing activities (4,248) 6,657 (2,259) (2,271) Net increase/(decrease) in cash and cash equivalents 2,888 (2,212) 3,000 2,683Cash and cash equivalents at 30 December 2006/31 December 2005 1,984 4,196 (1,511) (4,194) Cash and cash equivalents at28 December 2007/29 December 2006 4,872 1,984 1,489 (1,511) Notes to the financial statements 1 summary of significant accounting policies The principal accounting policies adopted in the preparation of these financialstatements are set out below. These policies have been consistently applied toall financial periods presented, unless otherwise stated. 1.1 Basis of preparation Flying Brands Limited (the "Company") is a limited liability companyincorporated and domiciled in Jersey. The consolidated financial statements ofthe Company comprise the Company and its subsidiaries (together referred to asthe "Group") and equity accounts for the Group's interests in associates.Separate financial statements of the Company are also presented. The accountingpolicies of the Company are the same as for the Group except where separatelydisclosed. These consolidated and separate Company financial statements have been preparedand approved by the Directors in accordance with International FinancialReporting Standards as adopted by the European Union ("adopted IFRS"). The financial statements have been prepared under the historical cost conventionas modified by the revaluation of certain financial assets and liabilities. Asummary of the more important Group accounting policies is set out below,together with an explanation of where changes have been made to previouspolicies on the adoption of new accounting standards in the period. The preparation of financial statements in conformity with adopted IFRSsrequires the use of estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of sales and expenses during the reporting period. Althoughthese estimates are based on management's best knowledge of the amount, event oractions; actual results ultimately may differ from those estimates. 1.2 Basis of Consolidation (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies so as to obtain benefits from its activitiesgenerally accompanying a shareholding of more than one half of the votingrights. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair value at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theGroup's share of the identifiable assets, liabilities and contingent liabilitiesacquired is recorded as goodwill. The results of the subsidiary undertakingsacquired or disposed of during the period are included in the consolidatedincome statement from the date of control commences until the date controlceases. Inter-company transactions, balances and unrealised gains on transactionsbetween group companies are eliminated. Accounting policies of subsidiaries havebeen changed where necessary to ensure consistency with the policies adopted bythe Group. (b) Investments in associates An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. Significantinfluence is the power to participate in the financial and operating policydecisions of the investee but is not control or joint control over thosepolicies. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting except whenclassified as held for sale. Investments in associates are carried in thebalance sheet at cost, less any impairment in value of the individualinvestments. Losses of the associates in excess of the Group's interest in thoseassociates are not recognised. Any excess of the cost of acquisition over the Group's share of the fair valuesof the identifiable net assets at the date of acquisition is recognised asgoodwill. Any deficiency of the cost of acquisition below the Group's share ofthe fair values of the identifiable net assets of the associate at the time ofacquisition (i.e. discount on acquisition) is credited in the ConsolidatedIncome Statement for the period of acquisition. Where a group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the relevantassociate. 1.3 Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular economic environment that aresubject to risks and returns that are different from those of segments operatingin other economic environments. 1.4 Foreign currency (a) Foreign currency transactions Foreign currency transactions are translated into the functional currency usingthe exchange rate prevailing at the date of the transaction. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at the period end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. (b) Foreign operations The assets and liabilities of foreign operations are translated to sterling atexchange rates at the reporting date. The income and expenses of foreignoperations are translated to sterling at the average rate for the reportingperiod. Foreign currency differences are recognised directly in equity. 1.5 Property, plant and equipment All property, plant and equipment (PPE) is shown at cost less subsequentdepreciation and impairment. Cost includes expenditure that is directlyattributable to the acquisition of the items. Depreciation on assets iscalculated using a straight-line method to allocate the cost to each asset toits residual value over its estimated useful life, as follows: % Buildings including glasshouses 0-4Plant and equipment 10-20Computer hardware, included in plant and equipment 20-33.33Motor vehicles, including tractors 15-25 Freehold land is not depreciated. The assets' residual values and useful lives are reviewed and adjusted ifappropriate, at each balance sheet date. Gains and losses on disposals aredetermined by comparing proceeds with the carrying amount and are included inthe income statement. Subsequent costs are included in the asset's carrying amount or recognised as aseparate asset, as appropriate, only when it is probable that future economicbenefits associated with the item flow to the Group and the cost of the item canbe measured reliably. All other repairs and maintenance are charged to theincome statement during the financial period in which they are incurred. 1.6 Goodwill and 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 on acquisition of subsidiaries is includedin intangible assets. Goodwill is tested annually for impairment and carried atcost less accumulated impairment losses. Gains and losses on the disposal of anentity include the carrying amount of goodwill relating to the entity sold.Goodwill is allocated to cash generating units for the purposes of impairmenttesting. The Group had no goodwill on transition to IFRS. (b) Intangibles - Trademarks Trademarks obtained on the acquisition of subsidiaries are shown at fair value.They have a definite useful life and are carried at fair value at the date ofacquisition less accumulated amortisation. Amortisation is calculated using thestraight line method to allocate the cost of the trademarks over their estimateduseful lives: Garden Bird Supplies until May 2013 (c) Intangibles - Customer Lists Customer lists obtained on the acquisition of subsidiaries are shown at fairvalue. They have a definite useful life and are carried at fair value at thedate of acquisition less accumulated amortisation. Amortisation is calculatedusing the reducing balance method based on the estimated annual attrition rates. Silverminds 48%Garden Bird Supplies 23%Greetings Direct 87% 1.7 Impairment (a) Financial assets A financial asset is assessed at each reporting date to determine whether thereis any evidence that it is impaired. A financial asset is considered impaired ifobjective evidence indicates that one or more events have had a negative effecton the estimated future cash flows of that asset. Individual significant financial assets are tested for impairment on anindividual basis. The remaining financial assets are assessed collectively ingroups that share similar credit risks characteristics. All impairment lossesare recognised in the profile or loss. (b) Non-financial assets The carrying amounts of the Group's non-financial assets are reviewed at eachreporting date to determine whether there is any indication of impairment. Ifany such indication exists, then the asset's recoverable amount is estimated.For goodwill and intangible assets that have indefinite lives or that are notyet available for use, the recoverable amount is estimated at each reportingdate. The recoverable amount of an asset is the greater of its value in use and itsfair value less costs to sell. In assessing value in use, the estimated futurecash flows are discounted to their present value using a pre-tax discount ratethat reflects current market assessments of the time value of money and the riskspecific to the asset. The goodwill acquired in a business combination, for thepurpose of impairment testing, is allocated to cash-generating units that areexpected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset exceeds itsrecoverable amount. Impairment losses are recognised in profit or loss. An impairment loss in respect of goodwill is not reversed. In respect of otherassets, impairment losses recognised in prior periods are assessed at eachreporting date for any indications that the loss has decreased or not longerexists. An impairment loss is reversed if there has been a change in theestimates used to determine the recoverable amount. An impairment loss isreversed only to the extent that the asset carrying amount does not exceed thecarrying amount that would have been determined if no impairment loss had beenrecognised. 1.8 Inventories Inventories are valued at the lower of cost and net realisable value. Cost isdetermined on a first in first out basis and includes transport and handlingcosts. Net realisable value is the price at which inventory can be sold in thenormal course of business after allowing for the costs of realisation. Provisionis made where necessary for obsolete, slow moving or defective inventories. Included within inventory are certain First Day Cover inventories. Theseinventories are valued as a proportion of the anticipated realisable value, as abest estimator of the lower of cost and net realisable value, based on expertopinion of the Group's philatelists. Provision is made for slow movinginventory. 1.9 Trade receivables Trade receivables are recognised initially at amortised cost, which is the fairvalue of consideration receivable and is adjusted for provision for impairment.A provision for impairment of trade receivables is established when there isobjective evidence that the Group will not be able to collect all the moniesdue. The amount of the provision is recognised in the income statement. 1.10 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks and other short-term highly liquid investments with maturities of threemonths or less. Bank overdrafts that are repayable on demand and form anintegral part of the Group's cash management are included as a component of cashand cash equivalents for the purpose of the statement of cash flows. 1.11 Bank Borrowings Interest-bearing loans and overdrafts are recorded at the proceeds received, netof direct issue costs. Finance charges, including premiums payable on settlementor redemption and direct issue costs, are accounted for on an accruals basis inprofit or loss using the effective interest rate method and are added to thecarrying amount of the instrument to the extent that they are not settled in theperiod in which they arise. 1.12 Loan notes receivables The loan note is receivable from an associate and is initially recognised atfair value. The financial asset is accounted for as a loan and receivable underIAS 39. 1.13 Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of ordinary shares and share options are recognised asa deduction from equity, net of any tax effects. Repurchase of share capital (treasury shares) When share capital recognised as equity is repurchased, the amount of theconsideration paid, which includes directly attributable costs, is net of anytax effects, and is recognised as a deduction from equity. Repurchased sharesare classified as treasury shares and are presented as a deduction from totalequity. When treasury shares are sold or reissued subsequently, the amountreceived is recognised as an increase in equity, and the resulting surplus ordeficit on the transaction is transferred to/from retained earnings. 1.14 Share based payments The fair value of the employees services received in exchange for the grant ofshare options is recognised as an expense. The total amount to be expensedrateably over the vesting period is determined by reference to the fair value ofthe options determined at the grant date, excluding the impact of any vestingconditions except for market conditions. The non-market vesting conditions areincluded in assumptions about the number of options that are expected to becomeexercisable. The estimate is revised at each balance sheet date and thedifference is charged or credited to the income statement, with thecorresponding adjustment to equity. The proceeds received on exercise of theoptions net of any directly attributable transaction cost are credited toequity. 1.15 Revenue recognition Revenue represents the invoiced value of goods supplied and is stated net of VATand any trade discounts. Revenue is recognised at the date of despatch of goodsto customers. Any refunds and expected bad debts or replacements are recognisedin the period in which the refund or replacement is made. Provision is made forexpected returns or bad debts of continuity products. Credit card commission andthe cost of overseas bouquets are treated as cost of sales. Interest income isrecognised on an accruals based method. 1.16 Operating leases Leases where the lessor retains substantially all the risks and rewards ofownership are classified as operating leases. Rentals payable under operatingleases are taken to the income statement on a straight line basis over the leaseterm. 1.17 Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liabilityin the Group's financial statements in the period in which the dividends aredeclared. 1.18 Taxation Income tax payable is provided on taxable profits using tax rates enacted orsubstantively enacted at the balance sheet date. Deferred taxation is provided in full, using the liability method on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. Deferred tax isdetermined using tax rates (and laws) that have been enacted or substantivelyenacted at the balance sheet date and are expected to apply when the relatedbalance sheet tax asset is realised or the deferred liability is settled.Deferred income tax assets are recognised to the extent that it is possible thatfuture taxable profit will be available against which temporary differences canbe utilised. Income tax is recognised in the income statement except to theextent that it relates to items recognised directly in equity, in which case itis recognised in equity. 1.19 Pensions The Group makes contributions to some employees' and Directors' personal pensiondefined contribution schemes which are accounted for on an accruals basis. 1.20 Marketing expenditure The Group charges external campaign marketing expenditure to the incomestatement in the accounting period in which the marketing materials aredistributed. 1.21 Fixed asset investments - Company Investments held as fixed assets are stated at cost less provision for anyimpairment. 1.22 Financial instruments (a) Financial guarantee contracts Where Group companies enter into financial guarantee contracts to guarantee theindebtedness of other companies within its Group, the Group considers these tobe insurance arrangements, and accounts for them as such. In this respect, theGroup treats the guarantee contract as a contingent liability until such time asit becomes probable that the Company will be required to make a payment underthe guarantee. (b) Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debtsecurities, trade and other receivables, cash and cash equivalents, loans andborrowings and trade and other payables. Non-derivative financial instruments are recognised initially at fair valueplus, for instruments not at fair value through profit or loss, any directlyattributable transaction costs. Subsequent to initial recognition non-derivativefinancial instruments are measured as described below. Cash and cash equivalents comprise cash balances and call deposits. Bankoverdrafts that are repayable on demand and form an integral part of the Group'scash management are included as a component of cash and cash equivalents for thepurposes of the statement of cash flows. 1.23 Accounting standards issued but not adopted A number of new standards, amendments to standards and interpretations are notyet effective for the year ended 28 December 2007, and have not been applied inpreparing these consolidated financial statements: • IFRS 8 Operating Segments introduces the "management approach" tosegment reporting. IFRS 8, which becomes mandatory for the Group's 2009financial statements, will require the disclosure of segment information basedon the internal reports regularly reviewed by the Group's Chief Executive inorder to assess each segment's performance and to allocate resources to them.Currently the Group presents segment information in respect of its business andgeographical segments. This is unlikely to change as a result of this standard. • Revised IAS 23 Borrowing costs removes the option to expense borrowingcosts and requires that an entity capitalise borrowing costs directlyattributable to the acquisition, construction or production of a qualifyingasset as part of the cost of that asset. The revised IAS 23 will becomemandatory for the Group's 2009 financial statements and will constitute a changein accounting policy for the Group. In accordance with the transitionalprovisions the Group will apply the revised IAS 23 to qualifying assets forwhich capitalisation of borrowing costs commence on or after the effective date. • IFRIC 11 IFRS 2 - Group and Treasury Share Transactions requires ashare-based payment arrangement in which an entity receives goods or services asconsideration for its own equity instruments to be accounted for as anequity-settled share-based payment transaction, regardless of how the equityinstruments are obtained. IFRIC 11 will become mandatory for the Group's 2008financial statements, with retrospective application required. It is notexpected to have any impact on the consolidated financial statements. 2. financial risk and credit risk management The Group has exposure to the following risks from its use of financialinstruments: Credit riskLiquidity riskMarket risk This note presents information about the Group's exposure to each of the aboverisks, the Group's objectives, policies and processes for measuring and managingrisks and the Group's management of capital. Further quantitative disclosuresare included throughout these consolidated financial statements. The Board of Directors has overall responsibility for the establishment andoversight of the Group's risk management framework. The Group's risk management policies are established to identify and analyse therisks faced by the Group, to set appropriate risk limits and controls, and tomonitor risks and adherence to limits. Risk management policies and systems arereviewed regularly to reflect changes in market conditions and the Group'sactivities. The Group Audit Committee oversees how management monitors compliance with theGroup's risk management policies and procedures and reviews the adequacy of therisk management framework in relation to the risks faced by the Group. (a) Credit risk Credit risk is the risk of financial loss to the Group if a customer fails tomeet its contractual obligations, and arises principally from the Group'sreceivables from customers. Trade and other receivable The Group's exposure to credit risk is influenced by the type of customer theGroup contracts with. The Group is exposed to a high number of low valuereceivables from retail customers. The Group assess the risk of these customersby applying historical trends to the likely event of these customers defaulting. Impairment to the value of this receivable is applied in line with thehistorical trends identified and any changes in risk to the portfolio of thedebt. (b) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financialobligations as they fall due. The Group's approach to managing liquidity is toensure, as far as possible, that it will always have sufficient liquidity tomeet its liabilities when due, under both normal and stressed conditions,without incurring unacceptable losses or risking damage to the Group'sreputation. The Group has a £500,000 overdraft facility to enable it to manage its liquidityrisk. (c) Market risk Market risk is the risk that changes in market prices, such as foreign exchangerates, interest rates and equity prices will affect the Group's income or thevalue of its holdings of financial instruments. The objective of market riskmanagement is to manage and control market risk exposures within acceptableparameters, while optimising the return. Currency risk The Group is exposed to currency risk on sales, purchases and borrowings thatare denominated in a currency other than the respective functional currencies ofthe Group entities, primarily the euro, U.S. Dollar and Australian Dollars. Therisks in the period to 28 December 2007 were minimal. The Group currently does not hedge any of its currency exposure due to theminimal impact of these currencies. However, as the business expandsinternationally during 2008 the Group will reassess its position. The Group's investment in its Australian subsidiary is also not currently hedgedbut this will be reviewed by the Group in future periods. Interest rate risk The Group has both fixed rate and floating rate loans. Thus the Group has someexposure to interest rate risk. (d) Capital management The Board's policy is to maintain a strong capital base so as to maintaininvestor, creditor and market confidence and to sustain future development ofthe business. The Board of Directors monitors the return on capital, which theGroup defines as net operating income divided by total shareholders' equity. TheBoard of Directors also monitors the level of dividends to ordinaryshareholders. From time to time the Group purchases its own shares on the market; the timingof these purchases depends on market prices. Primarily the shares are intendedto be used for issuing shares under the Group's share option programme. Buy andsell decisions are made on a specific transaction basis by the Risk ManagementCommittee; the Group does not have a defined share buy-back plan. There were no changes in the Group's approach to capital management during theyear. Neither the Company nor any of its subsidiaries are subject to externallyimposed capital requirements. 3 critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. 3.1 Critical accounting estimates and judgements The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates will, by definition, seldom equal the related actualresults. The estimates and assumptions that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities within thenext financial period are discussed below. (a) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, inaccordance with the accounting policy stated in Note 1.7. The recoverableamounts of cash generating units have been based on value-in-use calculations.These calculations require the use of estimates (Note 14). 4 segmental analysis The Directors of Flying Brands Limited are of the opinion that, whilst the Groupmarkets a number of different brands, all the business of the Group is operatedwithin the mail order retail segment in three primary divisions. Due to the different risks and rewards available on different lines of business,independent of territory operations, Flying Brands primary reporting segment isby business. The secondary reporting format comprises the geographical segment. Certain overhead costs, assets and liabilities are shared between segments.These costs, assets and liabilities have been apportioned based on the usage ofthese services and assets by the appropriate segment. 4.1 Segmentation by primary divisions Period ended Gifts Garden Entertainment Total28 December 2007 £'000 £'000 £'000 £'000 Revenue* 22,414 17,092 6,760 46,266 Segment result 1,623 2,856 576 5,055 Loss from associates (42)Write-off of associate investment (243)Abortive acquisition costs (749)Interest payable (539)Interest receivable 134 Profit before tax 3,616Taxation (334)Profit after tax 3,282Segment assets (including goodwill) 18,877 12,614 3,991 35,482Segment assets (excluding goodwill) 7,296 9,232 3,491 20,019Segment liabilities (12,695) (1,554) (1,928) (16,177) Depreciation 286 667 106 1,059Amortisation of intangible assets 107 154 31 292Capital expenditure on property, 751 456 99 1,306plant and equipment * Garden Division revenue includes £0.6m relating to a non-recurring VAT rebate. 4 segmental analysis continued Period ended 29 December 2006 Gifts Garden Entertainment Total £'000 £'000 £'000 £'000 Revenue 16,395 17,913 8,060 42,368 Segment result 2,708 2,366 223 5,297 Loss from associate (68)Interest payable (135)Interest receivable 175 Profit before tax 5,269Taxation (1,256)Profit after tax 4,013Segment assets (including goodwill) 21,500 10,956 3,525 35,981Segment assets (excluding goodwill) 9,414 7,574 3,025 20,013Segment liabilities (14,419) (1,745) (1,460) (17,624) Depreciation 446 790 164 1,400Amortisation of intangible assets 134 199 58 391Capital expenditure on property, plant and equipment 109 201 68 378 4.2 Segmentation by geographical areaRevenue by geographical area 2007 2006 Revenue by Revenue by customer customer location location £'000 £'000 Jersey, Channel Islands 62 74United Kingdom 43,634 40,911Australasia 822 -Europe 1,427 821Rest of World 321 562 46,266 42,368 Capital expenditure and assets by 2007 2006geographical area Capital Total Capital Total expenditure assets expenditure assets £'000 £'000 £'000 £'000 Jersey, Channel Islands 222 26,802 240 32,587 United Kingdom 1,082 7,845 138 3,394 Australasia 2 835 - - Europe - - - - Rest of World - - - - 1,306 35,482 378 35,981 5 operating expenses 2007 2006 £'000 £'000Selling and distribution 1,365 928Administrative expenses 6,212 5,677 7,577 6,605 6 abortive acquisition costs During 2007 the Group incurred £749,000 of fees relating to an investigation of a potentialacquisition. Due to the change in economic and trading conditions in the last 3 months of 2007, the Group was unable to proceed to completion with the proposed acquisition and is therefore required to write-off the costs incurred. 7 finance income and expense 2007 2006 £'000 £'000 Interest receivable 134 175Interest payable on bank loans (539) (135) Net finance income (405) 40 8 profit before taxation 2007 2006 £'000 £'000 The following items have been included in arrivingat operating profit:Depreciation charge: property, plant and equipment 1,059 1,400Amortisation of intangible assets 292 391Auditors' remuneration of the company's subsidiaries pursuant to legislation (parent company £nil (2006: nil)) 87 68Auditors' remuneration (tax compliance services) 33 22Auditors' remuneration other services pursuant to legislation (interim review) 10 8Auditors' remuneration for non-audit services (abortive acquisition) 291 -Other abortive acquisition costs (note 6) 458 -Profit on disposal of buildings (343) -(Profit)/loss on sale of plant and equipment 2 (1)Hire of land and buildings under operating leases 149 87Write off trade receivables 1,545 112Trade receivables impairment 486 418Cost of inventories recognised as an expense 14,348 12,247Restructuring costs 256 158Loss on write-off of assets due to sale of building (restructuring costs) 115 -Inventory write down (26) 194 9 employee information The average monthly number of persons (including Executive Directors) employedby the Group during the period was as follows: 2007 Number 2006 Number 291 299 2007 2006 £'000 £'000Staff costs (for the above persons)Wages and salaries 6,526 5,733Share based payments charge 38 78Social security costs 528 420Pension contributions to personal defined contribution schemes 169 135 7,261 6,366 10. taxation 2007 2006 £'000 £"000Current taxJersey income tax 319 1,015UK corporation tax 627 310Over provision in previous periods (466) (45)Total current tax 480 1,280Deferred taxDecrease in provision for the period (146) (24)Total tax on profit 334 1,256 The tax assessed for the period is different from the standard rate of incometax, as explained below: 2007 2006 £'000 £"000 Profit before tax 3,616 5,269Profit before tax multiplied by the standard rate of Jersey income tax of 10% (2006: 20%) 362 1,054Adjustments to tax in respect of prior periods (466) (45)Adjustments in respect of foreign tax rates 263 139Expenses not deductible for taxation purposes 239 (1)Other 6 -Unutilised losses (7) 87Amortisation on intangibles not allowable 3 22Disposal of building: capital gains not subject to taxation (66) -Tax charge for period 334 1,256 The UK current tax rate will be reduced from 30% to 28% with effect from 1 April2008. In line with this change, the rate applying to UK deferred tax assets andliabilities has also been reduced from 30% to 28%. Jersey income tax has been provided at 10% for the period ended 28 December 2007following the Income Tax (Amendment No 28) (Jersey) Law 1961 being registed bythe Royal Court of the Island of 22 June 2007. The rate for deferred tax assetsand liabilities has also been reduced from 20% to 10%. 11 parent company profit or loss for the financial period The parent Company profit for 2007 is £5.27m (2006: profit £0.05m). 12 dividends 2007 2006 £'000 £'000Dividends on equity sharesFinal dividend proposed in March 2007, agreed at annual general meeting in April 2007 at 6.30p (2006: 6.00p) 1,567 1,490 Interim dividend proposed at 3.30p (2006: 3.00p) per ordinary share in July 2007 and paid in September 2007 821 749 2,388 2,239 In addition the Directors are proposing a final dividend in respect of thefinancial period ended 28 December 2007 of 3.00p per share which will absorb anestimated £0.7m of shareholders funds. It will be paid on 1 May 2008 toshareholders who are on the register of members on 4 April 2008. 13 earnings per ordinary share Basic Basic earnings per share is calculated by dividing the profit attributable tothe equity holders of the Company by the weighted average number of ordinaryshares in issue during the period, excluding ordinary shares purchased by theCompany and held as treasury shares. 28 December 29 December 2007 2006 Profit attributable to equity holders of the Company (£'000) 3,282 4,013Weighted average number of ordinary shares in issue, less weighted average number of treasury shares (thousands) 24,863 24,836Basic earnings per share (pence per share) 13.20 16.16 Adjusted earnings per share which excludes one-off items is presented inaddition to that required by IAS 33 Earnings per share as the directors considerthat this gives a more appropriate indication of underlying performance. 28 December 29 December 2007 2006 £'000 £'000 Earnings used to calculate basic and diluted EPS 3,282 4,013Abortive acquisition costs (note 6) 749 -Write off of associate 243 -Prior year VAT rebate (after tax) (note 4) (412) -Restructuring costs (after tax) (note 8) 179 111Loss on write-off of assets due to sale of building (note 8) 115 -Profit on disposal of a building (343) -Earnings before one-off items 3,813 4,124Adjusted earnings per share before one-off items (pence) 15.34 16.61 13 earnings per ordinary share continued Diluted Diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares outstanding to assume conversion of all dilutivepotential ordinary shares. The Company has one category of dilutive potentialordinary shares: share options. The calculation is performed for the share options to determine the number ofordinary shares that could have been acquired at fair value (determined as theaverage market share price of the Company's shares) based on the monetary valueof the subscription rights attached to outstanding share options. The number ofshares calculated as above is compared with the number of shares that would havebeen issued assuming the exercise of the share options. 28 December 29 December 2007 2006 Profit attributable to equity holders of the Company (£'000) 3,282 4,013Weighted average number of ordinary shares in issue less weighted average numberof treasury shares (thousands) 24,863 24,836Adjustment for share options (thousands) 115 431Weighted average number of ordinary shares for diluted earnings per share (thousands) 24,978 25,267Diluted earnings per share (pence per share) 13.14 15.88 14 goodwill and intangible assets The Group Trade marks Customer lists Total intangibles Goodwill Total £'000 £'000 £'000 £'000 £'000CostAt 29 December 2006 431 1,472 1,903 15,968 17,871Additions - - - - -Adjustment for contingent consideration - - - (505) (505)At 28 December 2007 431 1,472 1,903 15,463 17,366AmortisationAt 29 December 2006 70 816 886 - 886Charges for the period 56 236 292 - 292At 28 December 2007 126 1,052 1,178 - 1,178Net book value 28 December 2007 305 420 725 15,463 16,188 14. goodwill and intangible assets continued The Group Trade Customer Total marks lists intangibles Goodwill Total £'000 £'000 £'000 £'000 £'000CostAt 30 December 2005 431 1,221 1,652 3,882 5,534Additions - 10 10 - 10Acquisition of subsidiaries (note 34) - 241 241 12,086 12,327At 29 December 2006 431 1,472 1,903 15,968 17,871AmortisationAt 30 December 2005 14 481 495 - 495Charges for the period 56 335 391 - 391At 29 December 2006 70 816 886 - 886Net book value 29 December 2006 361 656 1,017 15,968 16,985 On 15 September 2006 the Group acquired 100% of the share capital of directgreeting card businesses: Greetings Direct Limited, Greetings DirectInternational Limited and Greetings Direct Trading Limited (together "GreetingsDirect") for cash. The Company has a database of 700,000 customers of whichapproximately 52,000 were active customers at the date of acquisition. TheGoodwill acquired was £12,086,000, which is attributable to the highprofitability of the acquired business and the uniqueness of its continuityselling business model. The carrying value of intangibles is tested annually forimpairment. No impairment charge was considered necessary. The total cost of theacquisitions was £12,885,000, being cash consideration to the shareholders of£12,160,000 and direct costs attributable to the acquisition of £725,000.£1,700,000 of the consideration was held in an Escrow account at 29 December2006 and was released to the shareholders on 11 January 2007 after certainconditions had been met. As a result of certain performance criteria not being achieved in the periodending 28 December 2007, £505,000 of contingent consideration was not paid tothe previous shareholders of Greetings Direct. Thus the goodwill acquired wasreduced to £11,581,000. On 15 December 2006, Greetings Direct Trading Limited merged with Flying Flowers(Jersey) Limited under Article 127(c) of the Companies (Jersey) Law 1991 andfrom that date Greetings Direct Trading Limited ceased to be a companyincorporated under the Law. On 29 September 2005 the Group acquired 100% of the share capital of Garden BirdSupplies Limited, a home shopping retailer of garden bird food and accessories.The Group acquired a customer list of 486,000 names and the Ultiva trademark andother net assets with a fair value of £155,000. The goodwill acquired was£3,382,000, which is attributable to the high profitability of the acquiredbusiness and the significant synergies expected to arise after the Group'sacquisition. The recoverable amounts of goodwill used in the impairment assessment are basedon the anticipated future cash flows discounted at the Group's WACC (WeightedAverage Cost of Capital) being 9.03%. The forecasts are prepared taking intoaccount historical trading performance, anticipated changes in future marketconditions and anticipated changes in the taxation rates in Jersey. Detailedforecasts have been produced for the period to 31 December 2008. For GreetingsDirect the following years have been projected on the results expected for newgeographies based on the historical trends in existing geographies. TheDirectors believe that the greeting cards business model and concept can besuccessfully launched in the USA in 2008 and thus they consider at this juncturethat no impairment is required. Garden Bird Supplies forecasts are based onaverage growth assumptions of 3% per annum. 15 bank loans and overdraft Group Company Group Company 2007 2007 2006 2006 £'000 £'000 £'000 £'000 Bank overdraft - - - 1,511Bank loans 7,125 - 9,025 - 7,125 - 9,025 1,511The borrowings are repayable as follows:On demand or within one year 1,900 - 1,900 1,511In the second year 1,900 - 1,900 -In third to fifth years inclusive 3,325 - 5,225 -Less: Amount due for settlementwithin 12 months (shown undercurrent liabilities) (1,900) - (1,900) (1,511) Amount due for settlement after 12 months 5,225 - 7,125 - All loans and overdrafts are sterling denominated.The weighted average interest rates paid were as follows: 2007 2006Bank Overdrafts 6.50% 4.75%Bank Loans 6.46% 5.68% Two bank loans totalling £9,500,000 were arranged on 15 September 2006, one atfixed interest rates and thus exposing the Group to fair value interest raterisk. The other borrowing was arranged at floating rates, thus exposing thegroup to cash flow interest rate risk. The other principal features of theGroup's loans are as follows: (a) a loan of £4,500,000. The loan was taken out on 15 September 2006. Quarterly repayments commenced on 15 December 2006 and will continue until 15 June 2011. The loan is secured by a charge over certain of the Group's properties dated 15 September 2006. The loan carries interest rate at 0.6% above LIBOR. (b) a loan of £5,000,000. The loan was taken out on 15 September 2006. Quarterly repayments commenced on 15 December 2006 and will continue until 15 June 2011. The loan is secured by a charge over certain of the Group's properties dated 15 September 2006. The loan carries a fixed interest rate of 5.27% plus a 0.6% margin. At 28 December 2007 the Group had available £0.5m (2006: £0.5m) of an overdraftfacility. Barclays Bank plc has a right to full set off between all companies within theFlying Brands Limited Group. The Group currently has a £0.5m overdraft facility,which was used for 2 months during the financial period. This information is provided by RNS The company news service from the London Stock Exchange
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