MUBL.L Regulatory News (MUBL)

26 August 2011

MBL GROUP PLC

("MBL" or "THE GROUP")

Preliminary Results for the year ended 31 March 2011

The Board of MBL Group plc, the UK distributor of home entertainment products, announces its preliminary audited results for the year ended 31 March 2011.

Key points:

·; Revenue static at £195.3 million (2010: £194.9 million);

·; Profit before tax and exceptional items decreased to £1.5 million (2010: £9.9 million);

·; Exceptional items totalling £22.7m (including goodwill and fixed asset impairment of £18.8m) recognised in the year following the termination of a major contract on 4 April 2011;

·; Loss after exceptional items and before tax of £21.2m (2010: profit £9.9m);

·; Earnings per Share before exceptional items decreased to 5.5p (2010: 40.3p);

·; Results impacted by gross margin erosion, investment in new revenue streams and the consequences of the loss of the Group's major customer;

·; Debt free with cash balances of £3.5 million at 31 March 2011; and

·; No dividend is proposed (2010: 7.5 pence per share)

Commenting on these results, Peter Cowgill, Non-Executive Chairman of MBL, said:

"The Group has experienced an immensely challenging period both during the financial year ended 31 March 2011 and subsequent to the announcement of the termination of the contract relating to the Group's major customer in April 2011. The Group has been reviewing its business plan following the substantial downsizing in operations and the increasing challenges of operating within the home entertainment market. The remaining trade continues to perform to expectations but with increasing pressure on gross margins."

Enquiries:

MBL Group plc Tel: 07876 680373

Peter Cowgill, Non-Executive Chairman

Brewin Dolphin Limited Tel: 0845 213 4729

Mark Brady

Sean Wyndham-Quin

Bishopsgate Communications Ltd. Tel: 020 7562 3350

Deepali Schneider

Natalie Quinn

mbl@bishopsgatecommunications.com

CHAIRMAN'S STATEMENT

The Group has experienced an immensely challenging period both during the financial year ended 31 March 2011 and subsequent to the announcement of the termination of the contract relating to the Group's major customer in April 2011.

During the period sales revenues were static at £195.3m and operating profit before exceptional items reduced to £1.5m from £9.9m, representing a fall of £8.4m. The Group has reported a loss before tax of £21.2m with exceptional items of £22.7m being charged in the year.

Summary of results

Operational Performance

The Distribution business experienced a very difficult trading year being adversely affected by changes within the proposition of its major customer, which comprised 79% of Group sales, 80% of the volume, and shortfalls in sales to other customers. The primary change was an increased concentration of sales of chart titles, which generated a much lower gross margin and led to a significant increase in the level of product returned and the associated overhead costs. The Group's gross margin fell to 7.5% from 11.1% in the prior year.

Regretfully, the Group experienced the premature termination of business relations with its major customer in April 2011. The Group has continued to invest in the new direct routes to market of digital, eCommerce and retail during the year which has contributed to increased operating costs during the period. Whilst management had been working towards the need to reduce the customer concentration and invest in alternative opportunities, the execution of this strategy has been hindered by the impact of the premature termination.

The home entertainment market continued to be affected by high price competition from online retailers and supermarkets and this has affected sales to a proportion of the Group's customers. The Distribution business has also experienced increased competition from some of our suppliers directly offering their own propositions to the retail customer.

Termination of major contract

As previously announced, the Group had been informed that its major customer intended to exercise the early break clause on its supply contracts with MBL in September 2011, but that MBL had been invited to tender for the provision of home entertainment logistics services. The customer had also proposed to explore the viability of a Joint Venture with MBL for home entertainment products, utilising the proposed new purpose built site for this standalone business entity.

On 14 March 2011 the Board was informed that the customer had chosen to purchase products directly and would be utilising a third party for its ongoing home entertainment logistics services and the six months notice period was served on MBL.

The announcement that MBL had lost the contract led to the immediate withdrawal of the Group's bank facility and the withdrawal of credit insurance covering MBL, which resulted in the loss of credit limits from major suppliers. Due to this severe restriction in credit the remaining six month period became impossible for MBL to service and, as a consequence, on 4 April 2011 it was mutually agreed to terminate the contracts prematurely.

The difficult circumstances that have had to be managed following the termination have been a serious setback to the future plans of the Group. Management has focused on mitigating as far as possible the effects of the contracts loss as follows:

·; Attention toward stock and creditor management to ensure that the Group remains solvent:

- An agreement was reached in April 2011 with the major credit insurers and suppliers to repay on a weekly basis outstanding account balances over a two month period. As at August 2011, all major supply accounts within the Distribution business without queries have been repaid in full and supply continues in many cases on a 'cash with supply' basis.

- The Group's balance of stock has been significantly mitigated by the Group, utilising and negotiating supplier stock returns allowances and the use of clearance routes. As at August 2011, the Group's total gross stock has been reduced to £5.4m.

·; An immediate downsizing of operations commenced with those employees whose roles were directly assigned to the transfer of services being either made redundant or transferred to the new provider during April and May 2011. Regretfully, MBL was obliged to take responsibility for some employees and associated costs that should have transferred with these contracts. A further restructuring exercise was undertaken in June. The total headcount reduction has been 50% across the Group.

·; The Group announced in March that it intended to seek a disposal of all or parts of the business. This activity has led to advanced talks to dispose of part of the Group which is no longer considered key to the Group's operations.

·; The 15 year lease entered into in 2008 for a new purpose built distribution and office facility has been terminated. The Board has agreed to pay the sum of two year's rent, £1.2 million, as an exit fee.

A dialogue continues with the customer in relation to two outstanding issues which are as follows:

·; The debtor position with the customer has largely unwound in line with credit terms, however a balance remains that is subject to continued negotiation.

·; Discussion has been entered into with the customer regarding the stock balances attributable to the contracts however the issue of the remaining stock balance remains unresolved.

The Board's intention remains to resolve the remaining issues in a manner that is in the best interests of the Group.

Exceptional Items

During the year the Group has recognised several exceptional expenses.

Goodwill of £17 million had been recognised in the accounts in relation to the acquisition of Redworth Limited in 2004. The principle trading entity that this goodwill relates to is Music Box Leisure, the Distribution business. In light of the loss of its main customer, and the current challenges within its market, it was considered appropriate for the goodwill to be written down to nil.

The Group has exited its commitment for a new purpose built site for the sum of £1.2 million. This sum will be paid in instalments during this and the following financial year and avoids the obligation to occupy a larger and more expensive property and the associated costs of relocation.

The Group has undertaken a review of its fixed asset investments and, in particular, the assets that were acquired to service the significant volume increases it had experienced since 2008. As a result, machinery, fixed assets and investment in IT have been impaired within the Distribution business of £1.7 million. A further review has been undertaken within the Digital business, and as a result a further £0.4 million of development assets have been impaired.

The Group's investment in U Explore has been evaluated in response to the decision to potentially divest the Digital business. The investment in U Explore was entered into on the basis that synergies between the two businesses could be exploited which would lead to new opportunities for the Digital business. It is acknowledged that prima facie the investment in U Explore appears to have taken place at a high valuation. The rationale for this investment is that the Board were of the opinion that, notwithstanding the potential growth of U Explore in its own right, opportunities were to be gained in the education and Digital market which underpinned the investment decision. As a result of the changes in the Group's financial circumstances the Board considers it inappropriate to continue with the level of investment required to develop its Digital business. As a consequence, the Board's expectations have been revised, however the underlying value of this investment is considered to be a minimum value of £0.4 million.

 A further investment impairment of £0.3 million has been recognised in relation to the purchase of the domain name www.bee.com. Although the transactional website became operational in December 2010, the Board believes that this investment cost should be expensed rather than capitalised as a matter of accounting policy.

The restructuring and severance costs incurred following the termination of the Group's main contract have been recognised and amount to £1.2 million.

Cash generation

The Group has maintained its ability to generate good operating cash flows throughout the financial year and been able to manage its working capital post year end whilst under pressure. At the year end the Group has cash balances of £3.5 million and did not have any debt. As at August 2011, the Group continues to have cash balances of £2.0m to manage its operations within, despite the withdrawals of the limit within its bank facility and credit insurance.

Current trading and outlook

The Group has been reviewing its business plan following the substantial downsizing in operations and the increasing challenges of operating within the home entertainment market. The remaining trade continues to perform to expectations but with increasing pressure on gross margins.

The Board is focused on stabilising the business and are reviewing the investment requirements that are necessary for the less established business operations. It is anticipated that this may lead to further divestment of operations.

Peter Cowgill

Non-Executive Chairman 

26 August 2011

OPERATING REVIEW

The Group has experienced a very challenging year and continues to find the industry it operates within difficult. The consequences of the loss of the Group's major customer earlier this year has created a demanding environment and the Board has been reviewing each operating segment in detail to refocus the operating plan.

Strategy

The home entertainment industry is increasingly price competitive as more consumers look to purchase online and from supermarkets. This is considered to have had an impact on both the Group's Distribution and Wholesale divisions. The Group has invested in direct to consumer routes to market during the last year and initial indications are positive.

Distribution

Music Box Leisure

Music Box Leisure has historically been central to the Group and its customers are exclusively in the "non traditional" sector, for example supermarkets, discount retailers and motorway service centres, rather than conventional high street CD, DVD and Games retailers.

During the year external revenue decreased by 4.3% to £174.1 million from £182.0 million. The decrease was due to the ongoing challenges within the home entertainment industry as a whole. The increase in concentration of 'chart' products continued during the year, which generate lower margins than 'back catalogue' titles and as a result gross margins for the Group have fallen to 7.4% from 11.1%.

The loss of its main customer post year end has had a significant impact on Music Box Leisure as it adjusts to the substantial downsizing that followed. The termination was not managed over the expected notice period and led to a period where the business was absorbing the overhead required to service 79% of the Group's turnover without the associated sales revenue. The business continues to manage the downsizing process and to rationalise its own overhead and support contracts to reflect the lower volume levels.

Music Box Leisure provides a comprehensive supply service to its customers, which includes bespoke category management, labelling, point of sale, promotional offers and merchandising support. The future strategy is to deliver the customer a sustainable, competitive offer and a customer service experience within the commercial constraints of this sector.

Wholesale

MBL Direct ("MBLD")

MBLD is a wholesaler primarily to independent and internet retailers. The independent retail sector has experienced difficult times over the last few years.

External revenue at MBLD increased to £8.3 million from £8.0 million, although this has been at lower gross margins. MBLD competes on stock availability and price. The Group are presently reviewing how to develop and sustain this business within the present challenging environment.

Windsong International Limited ("WI")

WI is well known throughout the industry as an exporter of specialist and rare title CDs and DVDs.

WI experienced a successive good year and has grown its external sales from £4.7 million to £9.0 million.

Digital and eCommerce

Global Media Vault ("GMV")

Global Media Vault is a digital distributor of home entertainment titles and was acquired in 2009. Throughout the financial year extensive investment was made within this business to continue to support the development of its technological capabilities and key contracts. During the financial year GMV developed and launched an eCommerce platform with a major UK retailer which provides physical home entertainment products.

The change in circumstances within the Group has led the Board to consider that the investment required to continue to support GMV's development costs is too great and as a consequence the decision has been made post year end to seek a divestment of this business.

MBL 2010 Limited ("Bee.com")

In December 2010 the Group launched a direct to consumer website www.bee.com. Bee.com sells predominantly home entertainment products. In the financial year to March 2011, revenue was £0.3 million.

Retail

The Group commenced a small trial of three retail stores in 2010 which sell home entertainment products and accessories. The Board recognises the risk associated with long term leases and as such was unwilling to commit to additional stores until it was proven that the store proposition and locations were correct. As at August 2011, two stores remain which have been rebranded to the name 'Bee.com' to complement the investment in the direct to consumer website. The proposition has been adapted to offer the consumer the facility to trade in used titles and early signs are positive. We are presently in negotiation to open further stores.

The Board continues with a cautious approach to all future activities in order to conserve cash and ensure that only those opportunities that give the maximum return with calculated risk are pursued.

The impact the substantial downsizing has had on the morale and stability of the Group's employees cannot be ignored. In these difficult times I would like to thank the team for their ongoing support whilst the restructuring process is implemented. We remain committed to ensuring the Group recovers from these events.

Trevor Allan

Chief Executive

26 August 2011

FINANCIAL REVIEW

Financial highlights

The Group experienced a very tough trading environment during the year and although sales remained static at £195.3 million (2010: £194.9 million), extreme pressure on gross margins due to an increased concentration of sales of lower margin 'chart' titles, general pricing challenges and increased overhead costs to support new business streams, resulted in operating profit before exceptional items falling to £1.5 million (2010: £9.9 million).

The consequences of the loss of the Group's major customer led to a number of exceptional items being recognised in the year which total £22.7 million. The exceptional items are detailed within the Chairman's Statement.

Trading results 

Cash flow, working capital and borrowing facilities

Cash generation throughout the year remained positive and net cash from operating activities was £3.9 million (2010: £6.8 million). The cash reserves have supported the strategy to diversify the Group's operations and at the year end the business remained without external debt.

Following the announcement in March 2011 that the Group had received notice that its major customer would end its contracts with Music Box Leisure in September 2011, the Group experienced an immediate loss of supplier, bank and credit insurance confidence. As a consequence post year end the Group has had to manage working capital very carefully and the unwind of the working capital balances of creditors, debtors and stock associated with this customer.

The Group has managed to repay all major supplier balances but remains in a position of securing the majority of product supplies through the payment of cash in advance. It is not anticipated that this situation will improve until the business has a track record that its remaining operations are trading successfully.

The Group has managed to significantly reduce its stock balances by negotiating returns allowances with its major suppliers which has contributed to the reduction in supplier balances outstanding and in reducing the risk of aged and excess stock.

The withdrawal of the bank's confidence in the business resulted in MBL terminating its sales finance facility agreement in May 2011 to avoid incurring further facility charges. The Board continues to review its requirement for additional finance and its potential availability in line with the ongoing review of the business operations.

Taxation

The Group's effective tax rate was (1.29)% compared to 29.8% in 2010.

Summary

The Group has experienced a very challenging period both during the financial year to March 2011 and the current financial year. The Group has focused its attention on managing working capital to ensure that the Group remains solvent following the rapid loss of a significant volume of business.

The Board is in the process of prioritising the resources available to support the development of its future operations and continues to review and reduce its cost base in line with the downsized operations.

Lisa Clarke

Financial Director

26 August 2011

Consolidated Statement of Comprehensive Income

for year ended 31 March 2011

Consolidated Statement of Financial Position

at 31 March 2011

Consolidated Statements of Cash Flows

for year ended 31 March 2011

Notes to the Financial Statements

for the year ended 31 March 2011

1. Source of Information

The preliminary financial statements for the financial year ended 31 March 2011 were approved by the Board of Directors on 26 August 2011. The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2011 or 2011 but is derived from those accounts. Statutory accounts for 2010 have been delivered to the registrar of companies, and those for 2011 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) included a reference to matters which the auditors drew attention by way of emphasis of matter without qualifying their report, it drew attention to a material uncertainty in relation to the going concern of the Group due to loss of the Groups major customer and the embryonic stage of the resulting Group reorganisation and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The financial statements have been prepared on a going concern basis, which the Directors believe to be appropriate for the following reasons:

As per the Chairman's statement, in April 2011 the Group lost its major customer who accounted for 79% of the Group's revenue. Following this, the Group rationalised the business in order to mitigate as far as possible the effects of the contract loss. As part of the new business strategy being implemented the Group expects further rationalisation measures significantly reducing the Groups overhead costs.

The Group meets its working capital requirements through cash payments made in advance to suppliers following the loss of credit terms with a number of key suppliers. The Group had cash balances of £3.5m and £2.0m as at 31 March and 25 August 2011 respectively and currently do not have a bank overdraft or loan facilities.

The Directors have prepared cash flow forecasts to 31 March 2013 taking into account the revised strategy for the Group. These forecasts show the Group to be cash positive throughout the next 19 months and make a number of assumptions around revenue and profitability of the remaining business activity. Furthermore, the Group are also in the late stages of negotiations to dispose of two of its subsidiaries. At the time of approval of these financial statements negotiations are ongoing and so the disposal is conditional upon final agreement of the terms of the deal, including the sale price. This potential cash inflow has not been assumed in the forecast.

Nevertheless, the directors believe that the general economic conditions will continue to present challenges. Given the significant change in the Group's business strategy and the embryonic stage of its reorganisation there can be no certainty in relation to these forecast cash flows. Any material shortfall will mean that Group would need to obtain funding and as noted above there are currently no facilities in place.

 Accordingly the directors believe that the combination of these circumstances represents a material uncertainty that may cast significant doubt upon the Group's and Company's ability to continue as a going concern and it may be unable to continue to realise their assets and discharge their liabilities in the normal course of business. The financial statements do not contain any adjustments that would result from the basis of preparation being inappropriate.

2. Operating segments

Consolidated statement of comprehensive income for the year ended 31 March 2011

Reconciliation to loss before income tax:

Consolidated statement of comprehensive income for the year ended 31 March 2010

Reconciliation to profit before income tax:

3. Exceptional Items

The following exceptional items were charged to the Statement of Comprehensive Income during the financial year:

4. Earnings per Share

The calculation of basic earnings per share has been calculated on the loss after tax of £20,991,000 (2010: profit £6,935,000) and the weighted average number of shares in issue during the year of 17,296,068 shares of 75p each (2010: 17,296,068 shares of 75p each).

The calculation of diluted earnings per share is identical to that used for the basic earnings per share.

The adjusted earnings per share, as disclosed below, was calculated using the profits after tax for the financial year having added back exceptional items (after adjusting for the effect of tax) calculated with reference to the basic and diluted weighted average share in issue during the year.

5. Annual report

The Annual Report will be posted to shareholders in early September. Copies of the Annual Report will be available from the MBL Group plc, Unit 9 Enterprise Court, Lancashire Enterprise Business Park, Centurion Way, Leyland, PR26 6TZ and can be downloaded from the Company's website at www.mblgroup.co.uk.