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Brookfield Business Partners L.P.Falkland Islands Holdings plc Annual Report 2005 Contents Significant Events OF THE FINANCIAL PERIOD 1 2 8 Financial Highlights Chairman’s Statement and Review of Operations Group Activities 11 Board of Directors 12 Directors’ Report 21 Independent Auditor’s Report 22 Group Profit and Loss Account 23 Group Balance Sheet 24 Company Balance Sheet 25 Group Cash Flow Statement 27 43 Notes to the Financial Statements Directors and Corporate Information 19 May 2004 Purchase of 21.6% of The Portsmouth Harbour Ferry Company PLC (PHFC). 6 October 2004 Launch of full cash / share offer valuing PHFC at £35 per share. 11 October 2004 Placing of 1.49m Falkland Islands Holdings shares raising £4.7m net of expenses. 14 October 2004 Flotation of Falkland Oil and Gas Limited (FOGL) on AIM raising £12m. Market cap £32m at flotation price of 40p per share. Falkland Islands Holdings stake post float – 18.1% valued at £5.8m on flotation. 8 December 2004 Offer to acquire PHFC recommended by the PHFC Board. 9 December 2004 Flotation of Falkland Gold and Minerals Limited (FGML) on AIM raising £10m. Market cap £31.3m at flotation price of 40p per share. Falkland Islands Holdings retain 14.4% valued at £4.5m on flotation. Offer for PHFC declared unconditional. 26 January 2005 John Foster appointed to the Board as Deputy Managing Director. 24 March 2005 Completion of the acquisition of the entire share capital of PHFC. 7 April 2005 Falkland Oil and Gas announce ‘encouraging’ progress with 2D seismic survey work. Financial Highlights FALKLAND ISLANDS HOLDINGS PLC 1 2005 £’000 2004 £’000 Change % Turnover 12,754 11,082 15.1 Profit before tax and goodwill amortisation 963 847 13.6 Basic earnings per share before goodwill amortisation 8.9p 9.7p (8.2) Dividend per share Cash flow from operations 6.0p 777 5.75p 4.4 1,744 (55.4) Net asset value per share* 130.4p 57.0p 128.8 *Net asset value per share includes the investments in Falkland Oil and Gas Limited (FOGL) and Falkland Gold and Minerals Limited (FGML) at their cost of £0.9 million. Both companies are listed on AIM and the market value of the Group shareholdings at 31 March 2005 was £21.4 million. The net asset value per share based on that valuation is 374p. Turnover (£’000) Profit before tax (£’000) 11,814 11,447 11,082 9,984 12,754 1,003 1,025 963 847 355 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Earnings per share (pence) Dividend per share (pence) 11.80 10.90 5.50 5.75 6.00 9.70 8.90 5.00 4.60 2.10 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 2 ANNUAL REPORT 2005 Chairman’s Statement and Review of Operations Overview This has been a year of transformation for your Company of parking charges in Gosport in November 2004. To offset these factors fares were increased by 12.5% on during which its scale, valuation and prospects have 1 June 2005. moved to a higher level. The equity base has been Turnover in the Group’s core Falkland Islands business increased by some 36% through the issue of new shares increased marginally to £11.5 million (2004: £11.1 million) and the Group now has a much larger institutional as the Group saw the benefit of an earlier investment to representation amongst its shareholders. increase the size of retailing space at its flagship West The flotations of Falkland Oil and Gas Limited (FOGL) Store in Stanley. Vehicle sales remained strong and and of Falkland Gold and Minerals Limited (FGML) have insurance income also improved. Conversely the fishing placed a substantial value on our shareholdings and they agency had a quiet year and the hotel incurred losses as have both raised the required funds for major exploration a significant upgrade was carried out and the benefits of programmes. A successful outcome for either company this investment will be felt in the coming years. The will increase the value of our shareholdings and they Falkland Islands businesses achieved an increased profit of both have the potential to transform the economy of £1,294,000 (2004: restated £1,130,000) in the year. the Falklands which would be of substantial benefit to However Group results bore the impact of a substantial the Company. increase in Head office costs from £283,000 to £533,000 The acquisition in December of The Portsmouth reflecting increased staff costs and overheads associated Harbour Ferry Company (PHFC) has given us an excellent with the much increased scale of corporate activity. cash generative business in the UK which significantly improves the quality of the Group’s earnings. We have a Cash Flow strong track record in operating essential services like Cash flow at the operating level was satisfactory at these. £0.8 million and more closely reflected underlying The trading environment in the Falklands has remained profitability than the exceptionally high levels seen in subdued but with the benefit of three months trading 2004 which were due largely to favourable working from PHFC a satisfactory result has been achieved. capital movements. Tax and dividend payments totalled Your Board, as a sign of its confidence in the future, is £0.6 million in the year and were adequately covered by pleased to recommend a 4.4% increase in the dividend the net cash flow from operating activities. from 5.75p to 6.0p. Financial summary Trading During the year the Group invested heavily to broaden its operating base. In the year to March 2005, completion of the acquisition of PHFC had a cash cost of £5.5 million with a further £0.3 million to be paid in coming years and In the year to 31 March 2005 turnover rose by 15.1% to a further £0.6 million was invested in FOGL and FGML £12.8 million (2004: £11.1 million) and the profit before prior to their flotations. taxation increased by 6.0% to £898,000 (2004: Within the Group the cost of completing the purchase £847,000). Underlying profits before the amortisation of of the new ferry Spirit of Portsmouth was £1.0 million. goodwill rose by 13.6% to £963,000 (2004: £847,000). She entered service in June 2005 and with an estimated Basic earnings per share before goodwill amortisation useful life of 30 years will operate as both a ferry and a were 8.9 pence per share (2004: 9.7p). cruise ship in the harbour and the Solent area. PHFC, which was included for 16 weeks in what is the The cash cost of the acquisition of PHFC together quietest period of its year, accounted for turnover of with new capital expenditure totalled £7.3 million and £1.3 million and profit before tax and goodwill was funded largely by share placings with new amortisation of £202,000. This result was in line with our Institutional investors which raised £5.5 million. The expectations but profits declined marginally in 2004/5 balance of £1.8 million being funded by the draw down caused by increased salary and fuel costs and also by of loans (£1.0 million), the issue of new shares and the the impact on passenger numbers of the introduction use of existing cash resources. FALKLAND ISLANDS HOLDINGS PLC 3 The Portsmouth Harbour Ferry Company PLC The acquisition in December of PHFC “ has given the Group an excellent cash generative business in the UK which significantly improves the quality of the Group’s earnings. ” 4 ANNUAL REPORT 2005 Chairman’s Statement and Review of Operations CONTINUED Falkland Oil and Gas Limited A further 50,000 sq km acreage was “ acquired shortly after flotation and since then 2D seismic surveys have identified over 130 leads. The outlook for FOGL, which has an enviable position with effectively a 90% interest in 83,000 sq km, is exciting. ” FALKLAND ISLANDS HOLDINGS PLC 5 Investments The Group’s shareholdings in FOGL and FGML are stated Strategic transformation The acquisition of a good solid business in the United at cost of £900,000 in the accounts and their market Kingdom complementary to our businesses in the value at 31 March 2005 was £21.4 million equivalent to Falklands has been an objective since the Company £2.55 per Falkland Islands Holdings (FIH) share. moved to AIM in 2003. The acquisition of PHFC fulfilled Acquisition these criteria, and although the acquisition proved to be a difficult process, the purchase was finally completed in Control of PHFC was obtained on 9 December 2004. December. PHFC has operated a passenger ferry service from I am pleased to say that the ferry service has continued Gosport to Portsmouth for over 125 years and its to operate without disruption and its financial acquisition greatly strengthens the Group’s cash flow and performance has been in line with our expectations. The profitability. The acquisition was made at a total cost of new ferry, Spirit of Portsmouth, was launched on 11 May £7.5 million and was funded by cash of £5.7 million and 2005 and is now in full service. 2005 promises to be a the balance by the issue of new FIH shares and loan busy year for PHFC with the International Festival of the notes. Sea and Trafalgar 200 celebrations being based in Upon acquisition, PHFC had net assets of £3.3 million Portsmouth. giving rise to goodwill of £4.2 million, which is being In line with our undertakings to the people of written off over 20 years. Portsmouth and Gosport we have maintained a local Board of directors for PHFC and we thank the Board Balance Sheet members for their contribution. The financial statements at 31 March 2005 reflect the acquisition of PHFC and the further investments in the exploration companies noted above. The year end Exploration activities The flotations of FOGL and FGML in the last quarter of position also reflects the strengthening of the Group’s 2004 raised a total of £22 million from institutions and Balance Sheet which saw shareholders’ funds treble the public. Unfortunately it was not possible to give during the year from £3.5 million to £10.9 million priority in those issues to our own shareholders but following the expansion of the Group’s capital base. through our long term shareholdings of 18.1% in FOGL Tangible assets acquired with the purchase of PHFC and 14.4% in FGML shareholders will benefit from any included freehold land and buildings with a value of future success of these exploration ventures. £1.3 million, and ferries and other fixed assets totalling Both companies have made good progress in carrying £2.8 million. Together with £1.0 million spent on the ferry out the exploration programmes they outlined at purchase, these items largely account for the flotation. FOGL, which raised £12 million, acquired a £4.9 million increase in tangible fixed assets in the year. further 50,000 sq km shortly after flotation and since Working capital levels increased in the year in part then 2D seismic surveys have identified over 130 leads, reflecting the expansion of the business following the compared with just eight which had been identified at acquisition of PHFC. In addition stock levels increased as flotation. This has led its Board to expand significantly a result of the continued expansion of the Group’s retail the planned exploration programme. Accordingly, the activities in the Falklands. Other changes in working outlook for FOGL, which has an enviable position with capital reflect timing differences and a return to debtor effectively a 90% interest in 83,000 sq km (almost and creditor levels seen in earlier years. 20 million acres), is exciting. Shareholders can follow The Group ended the year in a strong financial position developments on its web site www.FOGL.com. and at 31 March 2005, with 90% of the new ferry paid The substantial increase in the scale of the work for, the Group had cash balances of £914,000 and programme has been funded in May this year by a £10 unutilised banking facilities of £3.3 million. million Institutional share placing. Your Company invested 6 ANNUAL REPORT 2005 Chairman’s Statement and Review of Operations CONTINUED £2 million which marginally increased our shareholding to We welcome to the Group the employees of PHFC and 18.3%. The FOGL share price has performed well since we look forward to working with them. I would also like flotation and the placing was achieved despite recent to express my appreciation to all our employees for their adverse sentiment in the sector. ongoing dedication to the business. FGML which raised £10 million has also made a good For further information on the Group, shareholders start. Initial set up work has included the commissioning should visit our new Company web site www.fihplc.com. of two drilling rigs and the establishment of a drilling base at Goose Green. A 1,500 km ground magnetic survey has now been completed and the Company has completed Outlook Our strategy is to ensure that the future of your Company three months of its 24 month initial drilling programme. is not wholly dependent upon our investments in the The results of drilling and the survey are currently being listed Falkland exploration companies. In 2005, with the analysed and further information will be available soon. PHFC acquisition, the first steps have been taken towards Results will be posted on the FGML web site building a meaningful business outside the Falklands. www.FGML.com. PHFC represents a good base on which we can build in Your Board views shareholdings in both these the domestic maritime sector. companies as long term investments and believes that The short term outlook in the Falklands remains shareholders will benefit from their retention. somewhat clouded by the fallout from the third successive year of poor Illex catches. However, the much People We were pleased to welcome John Foster, who joined the increased level of oil and minerals exploration activity is helping confidence in the Islands. With a full year’s Board in January 2005 as an executive director and today contribution from PHFC where we will benefit from the he succeeds Bryan McGreal as Managing Director. John’s increased fares which apply from 1 June 2005, a experience over 20 years in advising, managing and satisfactory result should be achieved for shareholders. investing in a variety of companies is well fitted to our future plans. Bryan, who is now 65, will be retiring from the Board at the Annual General Meeting. He has been with the Group since 1987 and has been Managing Director since 1997. His shrewd judgement and overall contribution have been of great value to shareholders and I would like to thank him most warmly on your behalf. I am delighted that his services will continue to be available to us as he has agreed to remain as a consultant for a year. David Hudd Chairman 10 June 2005 FALKLAND ISLANDS HOLDINGS PLC 7 Falkland Gold and Minerals Limited Initial set up work set up work has included “ the commissioning of two drilling rigs and the establishment of a drilling base at Goose Green. A 1,500 km ground magnetic survey has now been completed and the results are currently being analysed. ” 8 ANNUAL REPORT 2005 Group Activities Following the acquisition of The Portsmouth Harbour FIC also provides logistical support and port agent Ferry Company and the successful admission to AIM of services for visiting cruise ships that come to Stanley en the two Falkland Islands exploration companies in the route to the Antarctic or Patagonia. The number of cruise 4th quarter of 2004, Falkland Islands Holdings now has ships visiting the islands has risen sharply in recent years, two principal operating businesses and substantial more than trebling since 1995 to over 80 vessels in 2004. shareholdings in two listed companies. FIC also has the capacity to provide maintenance and The Falkland Islands Company (FIC) support vessels and combat ships of the Royal Navy. 100% shareholding Recently the Agency has been acting as the agent The Groups’ operations in the Falkland Islands date back for the GSI Admiral which has been carrying out seismic over 150 years to 1852 when the Company was granted surveys in the area for the last six months for FOGL repair services and the provision of agency services for the its Royal Charter. From its early days as a major landowner and others. and sheep farmer controlling almost half the land area of the Islands, the Group has steadily widened its activities to Automotive provide a broad range of essential services to the people With only a basic road infrastructure outside the main of the Falklands. Retailing urban area of Stanley, 4WD vehicles are an essential part of Island life. FIC is the authorised importer for the full range of Land Rover products for the Falkland Islands. The Retailing forms the largest single element of FIC‘s trading Company also provides a full spares and repair and activities. Locally grown and supplied produce is used maintenance facility at its Stanley workshops. It also wherever possible but most of FIC’s products are sourced supplies DAF heavy trucks, CAT earthmovers and Suzuki from the UK and would be familiar to any shopper in a UK vehicles and motorbikes. supermarket. FIC’s retailing operations are the largest on the Islands with a market share estimated at around 60% Property, Insurance and Port Services although there is competition from a number of smaller Although having divested its agricultural holdings in independent retailers. FIC has nine retail outlets in total, 1991, FIC has retained a number of parcels of land ranging from the 7,500 sq ft West Store supermarket in aggregating some 400 acres, with the potential for central Stanley to the Capstan tourist gift shop on the residential or commercial development. The Company waterfront that serves the 40,000 cruise ship passengers also owns 22 residential properties which are rented out that visit the Islands each year. Other outlets sell clothing, on a long-term basis to business users such as Ministry of office supplies, DIY, home improvement and building Defence contractors, and fishing companies. FIC is supplies. In total FIC has nearly 30,000 sq ft of retail space steadily developing these sites as the economy of the in the Stanley area and a retail outlet located at the Islands continues to grow and is well placed in the event military base at Mount Pleasant. that significant Oil or Mineral production takes place. Fishing Agency FIC is also a significant insurance broker in the Falkland Islands and now acts as the sole agent for the The cold waters around the Falkland Islands are a Caribbean Alliance Insurance Company which is a former prolific source of fish and squid and attract fishing fleets subsidiary of Royal and Sun Alliance who withdrew from from all over the world, particularly from Japan, Korea and the Islands in 2003. Since then more active management Taiwan. FIC provides a broad range of logistic, by CAIC has led to significant growth in the insurance administrative, supply and maintenance services to these business. The Company also manages the port and wharf offshore fishing fleets that can be away from their home at Stanley. ports for several months at a time. Income from the Fishing Agency is dependent on the duration of the Darwin Shipping fishing season which in turn depends on the size of the FIC operates its own shipping business currently chartering squid and fishing shoals. Recent years have seen a five vessels a year to supply freight services to the Islands sharp fall in the level of the annual catch of Illex squid with regular runs to the South Atlantic from the UK. The and a consequent reduction in the contribution from service is used both by FIC’s own operations and by the agency. independent businesses and private individuals. FALKLAND ISLANDS HOLDINGS PLC 9 Falkland Islands Holdings plc The Falkland Islands Company Limited Percentage of shares held 100% Falkland Oil and Gas Limited Percentage of shares held 18.1% The Portsmouth Harbour Ferry Company PLC Percentage of shares held 100% Falkland Gold and Minerals Limited Percentage of shares held 14.4% The Portsmouth Harbour Ferry Company PLC from families who have worked as watermen in the 100% shareholding harbour for generations. The ships are serviced and The Portsmouth Harbour Ferry Company (PHFC) has a maintained by the Company’s own team of specialist history almost as long as that of its new fellow subsidiary, marine engineers and shipwrights who are based at a The Falkland Islands Company. Incorporated in 1884 the one acre site at Clarence Marina half a mile from the business has provided a passenger ferry service across the Company’s Gosport base. mouth of Portsmouth harbour from Gosport to Portsea PHFC currently operates four vessels on its ferry service for well over 100 years. with two on duty on any given day. The oldest two vessels PHFC provides a vital service to the residents of Gosport were commissioned in 1966 and are still in excellent many of whom work or travel to the shops or restaurants condition but the Company has recently taken delivery of in the larger City of Portsmouth across the water. a new ferry, Spirit of Portsmouth, which is capable of Approximately half a mile across the harbour by sea, the carrying 300 passengers and of doubling as a pleasure ferry journey takes a little over 5 minutes whereas the cruiser in summer. journey by road to Portsmouth skirting around the head of The Company is committed to maintaining and where the harbour is approximately 14 miles long and in today’s possible extending the ferry service it offers to passengers congested traffic the journey can take up to an hour. but with increased tourist activity in the Portsmouth and Ferry services run for 18 (cid:1)(cid:2) hours a day from 5.30am until midnight, crossing the harbour every 7(cid:1)(cid:2) minutes in peak periods. The ferry service operates 363 days a year and in Solent area particularly in the coming year with the 200th anniversary celebrations of the battle of Trafalgar and the International Festival of the Sea in July, the Company is calendar 2004 carried almost 4 million passengers. well placed to develop its pleasure cruising activities and The ferry is renowned for its reliability and the friendly also to use its vessels for special events, weddings, parties and efficient service of its crew many of whom come and corporate entertaining. 10 ANNUAL REPORT 2005 Group Activities CONTINUED Falkland Gold and Minerals Limited 14.4% shareholding Initial interpretation of the new data gives considerable cause for optimism. The preliminary results of the survey Falkland Gold and Minerals Limited (FGML) was identify numerous Direct Hydrocarbon Indicators (DHI’s) incorporated in February 2004 and has an exclusive pointing to the presence of working petroleum systems. license for mineral exploration on all of the onshore land The leads are large and diverse, with some leads possibly mass of the Falkland Islands. covering areas of 300 to 500 sq km, sufficient to hold Based on preliminary exploration work and the results large reserves of oil or gas. of an aeromagnetic survey which identified magnetic FOGL now represents a much larger project than anomalies that indicate the possible presence of originally anticipated and as a result the planned scope of commercial gold deposits, the Company raised £10 the exploration programme has been increased far million through a flotation on AIM in December 2004 to beyond that envisaged at the time of the share placing. fund more detailed exploration of the areas identified. The plan now is to conduct further 2D seismic work and A systematic drilling programme has been commenced a contract has already been signed to acquire at least a in the Goose Green area by an experienced team of further 8,000 km of 2D. A 3D seismic survey over up to geological engineers and is scheduled for completion by 2,000 sq km is also under consideration. The target is to the end of 2007. develop a portfolio of about 20 high quality and Following the AIM listing FIH holds 11,250,000 FGML technically drillable prospects by the end 2006, with shares. At the balance sheet date this 14.4% holding had drilling expected to start in 2007. a book value of £0.2 million and a market value based on To fund the expanded programme, FOGL conducted a the FGML share price at 31 March 2005 of £4.3 million. share placing in May 2005 in which FIH participated Falkland Oil and Gas Limited 18.1% shareholding acquiring a further 2.3 million shares at 85p which resulted in a slight increase in the shareholding to 18.4%. The placing raised £10 million, which together with A year ago, FIC had a 20% interest in the Falkland FOGL’s existing cash resources of £11 million, will enable Hydrocarbon Consortium. In the last twelve months the the Company to fund its planned exploration programme consortium has been transformed into Falkland Oil and and cover all the Company’s overheads through 2006. It Gas Limited (FOGL) and tremendous progress has been is also anticipated that discussions will commence with made. FIC still retains an 18% interest in FOGL. potential operating partners in the second half of the FOGL was admitted to AIM in October 2004 at 40p per year. share, raising £12 million in the process. At that time, it At 31 March 2005 the Group held 14,450,000 FOGL held a 77.5% interest in licences covering 33,700 sq km shares with a market value of £17.1 million. Following the and the available data enabled eight leads to be recent share placing FIH owns 16,803,000 shares with a investigated. In December 2004, FOGL applied for and cost of £2.7 million. was awarded a 100% interest in licences covering an Any oil and gas exploration production would be likely additional 50,000 sq km. to have a dramatic impact both on the Islands’ Immediately following the share placing a 9,450 km 2D population, currently some 3,000 people and on the seismic survey commenced which was completed in May economy. FIC would be a major beneficiary of this. 2005. The seismic work provides a 2 dimensional map of Already there is much activity in the region with a number the rock strata under the sea bed and is designed to of other companies exploring for oil and gas around identify potentially oil bearing formations. The results of the Falkland Islands. They include two other AIM listed the survey were encouraging and revealed leads both in companies, Desire Petroleum and Borders and Southern. the original licensed area but also in the totally FOGL shares have performed well since admission unexplored northern licence area. To date some 130 leads to AIM and your Board intends to be a long-term have been identified compared with just eight at the time shareholder. of the share placing. Board of Directors FALKLAND ISLANDS HOLDINGS PLC 11 1 2 3 1 David Hudd (60) Chairman (n) David joined the Board on 4 March 2002 and is Chairman of the Nominations Committee. He is a Chartered Accountant and was a partner in Price Waterhouse until 1982. Since then, he has been Chairman or Chief Executive of a number of listed companies. He was, until April 1998, Executive Chairman of Vardon plc (now Cannons Group Limited), a company he founded. He is currently non-executive Chairman of API plc and of Betcorp Limited, non-executive Deputy Chairman of both Falkland Oil and Gas Limited and Falkland Gold and Minerals Limited and a director of QA plc. Bryan McGreal (65) Managing Director Bryan was appointed to the Board on 17 October 1997. He joined the Falkland Islands Group of Companies as Managing Director in 1987. 2 John Foster (47) Deputy Managing Director John joined the Board on 26 January 2005. He is a Chartered Accountant and previously served as Group Finance Director for Macro 4 plc between 2000 and 2003, and Hamleys plc between 1998 and 2000. Prior to joining Hamleys, he spent three years as Corporate Finance Director of Ascot plc and before that worked for nine years as a venture capitalist with a leading investment bank in the City. 3 Anthony Knightley (55) Finance Director Tony was appointed to the Board on 4 September 2002. He is a fellow of the Association of Chartered Certified Accountants. He was appointed Company Secretary on 17 October 1997 and was previously Group Financial Officer of Anglo United plc. Leonard Licht (60) Non-executive Director (a) (n) (r) Leonard was appointed to the Board on 8 December 1999. He was a founding Director and Vice Chairman of Mercury Asset Management Group PLC from 1987 to 1992 and Deputy Chairman of Jupiter Asset Management PLC from 1992 to his retirement from fund management in 1996. He is Chairman of Hg Capital LLP. He is a member of the Company’s Nominations and Remuneration Committees and a member and Chairman of the Company’s Audit Committee. Sir Harry Solomon (68) Non-executive Director (a) (n) (r) Sir Harry was appointed to the Board on 8 December 1999. He qualified as a solicitor in 1960 and entered private practice. He was joint founder and Chief Executive Officer of Hillsdown Holdings plc and subsequently became Chairman, resigning in 1992. He is currently a Director of a number of companies both private and public. He is a member of the Company’s Nominations and Audit Committees and a member and Chairman of the Remuneration Committee. (a) Member of the Audit Committee (n) Member of the Nomination Committee (r) Member of the Remuneration Committee 12 ANNUAL REPORT 2005 Directors’ Report The Directors present their annual report and the financial statements for the Company and for the Group for the year ended 31 March 2005. The annual report also includes the Board’s statement on its corporate governance policies and procedures, confirmation of the Board’s remuneration policy and details of how it applies that policy. Results and dividend The Group’s results for the year, together with the appropriations made and proposed, are set out in the Group profit and loss account on page 22. The Group profit for the year after taxation amounted to £589,000 (2004: £592,000). The Directors recommend the payment of a dividend of 6.0p (2004: 5.75p) per share which, if approved by the shareholders at the forthcoming Annual General Meeting, will be paid on 3 November 2005 to shareholders on the register at the close of business on 7 October 2005. Basic earnings per share were 8.0p (2004: 9.7p). Principal activities and business review The business of the Group during the year ended 31 March 2005 was general trading in the Falkland Islands and since 9 December 2004 the operation of a passenger service across Portsmouth Harbour. The principal activities were retail and wholesale distribution, servicing the fishing industry, port operation, shipping, automotive, financial services, hotel and commercial accommodation, and investments in companies that are exploring for minerals onshore and oil offshore. The principal activity of the Company is that of a holding company. A review of the Group’s business activities over the year, together with developments since the year end and intended future developments, is included in the Chairman’s Statement and Review of Operations on pages 2 to 10. Directors and Secretary Information about the Directors and Secretary is set out below and details of the remuneration packages and service contracts of Directors appear under the headings ‘Remuneration’ and ‘Details of Directors’ Remuneration and Emoluments’ on pages 17 and 18. Details of how the Board and the principal Board Committees operate are set out below and under the heading ‘Board Committees’ on page 13 and also under the heading ‘Corporate Governance’ on pages 14 to 16. The Board currently comprises a part-time executive Chairman, three executive Directors and two non-executive Directors, whose biographies are on page 11. All the Directors are subject to retirement by rotation under the Company’s Articles of Association and must submit themselves for re-election every three years. The Directors retiring by rotation at the forthcoming Annual General Meeting are Mr David Hudd, Mr Anthony Knightley and Sir Harry Solomon and, being eligible, they offer themselves for re-election. During the year the Company maintained liability insurance for the Directors and Officers of the Company and for the Directors and Officers of its subsidiaries. Directors’ interests The interests of the Directors in the issued shares and share options over the shares of the Company are set out below under the heading ‘Directors’ Interests in Shares’ on pages 18 and 19. During the year, no Director had an interest in any significant contract relating to the business of the Company or its subsidiaries other than his own service contract. Board committees The three principal standing committees of the Board are the Audit, Nominations and Remuneration Committees. The Audit Committee comprises Leonard Licht and Sir Harry Solomon and is chaired by Leonard Licht. The Company’s Auditor is normally in attendance. The Audit Committee reviews the external audit activities, monitors compliance with statutory requirements for financial reporting and reviews the half year and annual financial statements before they are presented to the Board for approval. The Audit Committee also keeps under review the scope and results of the audit and its cost effectiveness and the independence and objectivity of the Auditor and the effectiveness of the Group’s internal control systems. The Nominations Committee comprises David Hudd, Leonard Licht and Sir Harry Solomon and is chaired by David Hudd. The Committee nominates candidates (both executive and non-executive) for the approval of the Board to fill vacancies or appoint additional persons to the Board. It also makes recommendations regarding the composition and balance of the Board. Details of the Remuneration Committee, its members and activities are set out below under the heading ‘Remuneration’ on page 16. FALKLAND ISLANDS HOLDINGS PLC 13 Health and safety The Group is committed to the health, safety and welfare of its employees and third parties who may be affected by the Group’s operations. The focus of the Group’s efforts is to prevent accidents and incidents occurring by identifying risks and employing appropriate control strategies. This is supplemented by a policy of investigating and recording all incidents. Employees The Board is aware of the importance of good relationships and communication with employees. Where appropriate, employees are consulted about matters which affect the progress of the Group and which are of interest and concern to them as employees. Within this framework, emphasis is placed on developing greater awareness of the financial and economic factors which affect the performance of the Group. Employment policy and practices in the Group are based on non-discrimination and equal opportunity irrespective of age, race, religion, sex, colour and marital status. In particular, the Group recognises its responsibilities towards disabled persons and does not discriminate against them in terms of job offers, training of career development and prospects. If an existing employee were to become disabled during the course of employment, every practical effort would be made to retain the employee’s services with whatever retraining is appropriate. The Group’s pension arrangements for employees are summarised in note 17 on pages 36 to 39. Share capital and substantial interests in shares During the year a further 319,906 shares were issued as partial consideration for the purchase of 100% of The Portsmouth Harbour Ferry Company plc. There were two placements of shares for cash during the year to fund the acquisition. The first was of 308,500 shares at £2.55 per share and the second of 1,492,537 shares at £3.35 per share. In addition, 88,500 share options were exercised in the year. The authorised share capital has been increased to 10,000,000 ordinary shares. Further information about the Company’s share capital is given in note 18 on page 39. Details of the Company’s Executive Share Option Scheme and Employee Ownership Plan can be found on pages 18 and 19 and in note 18 on page 39. The Company has been notified of the following substantial interests in the issued ordinary shares of the Company as at 1 June 2005. Substantial shareholdings Artemis Investment Management INVESCO English & International Trust plc Jupiter Asset Management L S Licht Sir Harry Solomon Payments to suppliers Number of shares Percentage of issued shares 908,015 396,904 292,200 791,250 425,027 10.84 4.74 3.49 9.44 5.07 The policy of the Company and each of its trading subsidiaries, in relation to all its suppliers, is to settle the terms of payment when agreeing the terms of the transaction and to abide by those terms provided that it is satisfied that the supplier has provided the goods or services in accordance with agreed terms and conditions. The Group does not follow any code or standard on payment practice. As a holding company, the Company had no trade creditors at either 31 March 2005 or 31 March 2004. Charitable and political donations Charitable donations made by the Group during the year amounted to £3,241 (2004: £4,728). There were no political donations. Auditors A resolution proposing the re-appointment of KPMG Audit Plc will be put to shareholders at the Annual General Meeting. 14 ANNUAL REPORT 2005 Directors’ Report CONTINUED Annual General Meeting The Company’s Annual General Meeting will be held at the London offices of the Company’s Solicitors: Addleshaw Goddard, 25 Cannon Street, London EC4M 5TB on 25 July 2005 at 11.30am. The Notice of the Annual General Meeting and a description of the special business to be put to the meeting are contained in the separate Circular to Shareholders which accompanies this document. Corporate governance The Board is responsible for the governance of the Company, governance being the systems and procedures by which the Company is directed and controlled. A prescribed set of rules does not itself determine good governance or stewardship of a company and, in fulfilling their responsibilities, the Directors believe that they govern the Company in the best interests of the shareholders, whilst having due regard to the interests of other ‘stakeholders’ in the Group including, in particular, customers, employees and creditors. In addition, and notwithstanding that the Company’s shares are now traded on the Alternative Investment Market of the London Stock Exchange plc the policy of the Board is to continue to manage the affairs of the Company substantially in accordance with the principles of Good Governance and Code Provisions set out in Section 1 of the Combined Code on Corporate Governance appended to the Listing Rules of the Financial Services Authority (the ‘Combined Code’) despite there being no legal requirement to comply. For the year under review the Company has complied in all respects with the Combined Code except as follows: • Currently, the non-executive Directors have no service contracts and are not appointed for specific periods under letters of appointment or otherwise, although they are subject to retirement by rotation under the Company’s Articles of Association on the same basis as executive Directors. • Executive share options have been awarded in ‘blocks’ in order to provide sufficient incentive to the relevant Directors (taking into account the total number of shares in issue). • Any bonus paid to Messrs McGreal and Knightley is pensionable since the Board is of the opinion that, because of the diversified nature of the Group’s activities, the influence of the Managing Director and Finance Director justifies such bonus payments being pensionable. • The Chairman is also a part-time executive director of the Company. The following parts of this Directors’ Report, which reflect the provisions of the Combined Code, describe the Board’s approach to some key areas of corporate governance and how the principles of the Combined Code are applied. The provisions of the Combined Code applicable to the Company are divided into four parts: Part A: Directors Part B: Directors’ remuneration Part C: Relations with shareholders Part D: Accountability and audit Part A: Directors The Board currently comprises a part-time executive Chairman, three executive Directors, and two non-executive Directors. It is the policy of the Nominations Committee and the Board to maintain an appropriate balance between executive and non-executive Directors. As reflected in the biographical details of the Directors given on page 11, the Directors have a wide range of business, general and international experience, which they can contribute to the Group. The non-executive Directors are considered to be independent of management. The Chairman is primarily responsible for the workings of the Board and ensuring that its role is achieved. Save for matters reserved for the Board, the Managing Director with the support of the Chairman, is responsible for the running of the Group’s business, carrying out the agreed strategy adopted by the Board and implementing specific Board decisions relating to the operation of the Group. The Combined Code states that the Board should have a recognised senior independent Director to whom any concerns can be conveyed. Leonard Licht has been elected by the Board as the senior independent Director. FALKLAND ISLANDS HOLDINGS PLC 15 The Board meets on a regular basis and appropriate documentation and financial information is provided in advance of each Board meeting. These normally include monthly management accounts and a report from the Chairman on corporate issues and from the Managing Director on the management accounts, the performance of the Group’s businesses, the Group’s current trading and prospects and business issues facing the Group. Regular reports are given to the Board on such matters as insurances, treasury issues and pensions and specific presentations are made on business or strategic issues when appropriate. These procedures are intended to ensure that the Board is supplied in a timely manner with information appropriate to enable the Board to discharge its duties. The Board has a formal schedule of reserve powers, which it retains for Board decision-making on a range of key issues, including the formulation of strategy, major items of capital expenditure, treasury policy and the approval of budgets. A procedure has been adopted for Directors to obtain independent professional advice, where appropriate, at the cost of the Company and all Directors have unrestricted access to the Company Secretary. In relation to non-reserved matters, the Board is assisted by three Committees with delegated authority. The Audit, Remuneration and Nominations Committees and the make-up and roles of those Committees are described on pages 11 and 16. On appointment, Directors are briefed regarding the activities of the Group and encouraged to visit its businesses. Manuals, books and training are available to all Directors on their duties as Directors. On appointment, the Company Secretary would ensure that any new Director has access to appropriate training or advice which may be relevant. Directors are also informed regularly on relevant material changes to laws and regulations affecting the Company or the Group’s businesses. Part B: Directors’ remuneration Details of Directors’ remuneration and emoluments and the Company’s compliance with the Combined Code’s requirements regarding remuneration matters are set out below under the headings ‘Remuneration’ and ‘Details of Directors’ Remuneration and Emoluments’ on pages 18 and 19. Part C: Relations with shareholders The Company seeks to maintain good relations with shareholders and maintains a dialogue with institutional and individual shareholders on an ongoing basis. The Company makes every reasonable effort to respond, as appropriate, to telephone and postal enquiries from private and institutional investors. At the Annual General Meeting separate issues are proposed as individual resolutions. The Company despatches the notice of Annual General Meetings, with an explanation of any special business, at least 20 working days before the meeting. All shareholders have the opportunity formally and informally to put questions at the Company’s Annual General Meetings. The Chairmen of the Audit, Nominations and Remuneration Committees would normally attend the Annual General Meeting to answer questions which may be relevant to the work of those Committees. Details of the proxy voting on each of the resolutions are made available at the meeting. Part D: Accountability and audit The respective responsibilities of the Directors and Auditors in connection with the financial statements are explained below under the headings ‘Statement of Directors’ Responsibilities’ on page 20 and ‘Respective Responsibilities of Directors’ and Auditors’ on page 21. The Directors confirm that they have established procedures necessary to implement the provisions of the Combined Code as set out in the Listing Rules of the Financial Services Authority and have complied with it for the year to 31 March 2005. The Board has overall responsibility for ensuring that the Group maintains a system of internal controls and the Board has formally reviewed the effectiveness of the internal control system of the Group for the year ended 31 March 2005 (including financial, operational and compliance and risk management controls). Internal control systems, by their nature, can provide reasonable, but not absolute, assurance with respect to the preparation of financial information and the safeguarding of assets. It is also recognised that it is the nature of any business that commercial risk must be taken and, for a business to succeed, enterprise, initiative and motivation are key elements to success which should not be unduly stifled. 16 ANNUAL REPORT 2005 Directors’ Report CONTINUED The Board’s internal control system focuses on a wide range of business and financial risks. An ongoing procedure has been established by the Board for identifying, evaluating and monitoring the business risks faced by the Group and this process incorporates discussions with all levels of management, both in the UK and the Falkland Islands. It is intended that this procedure will be continually reviewed and developed in the future through liaison with line management. The Group’s framework of internal control includes: • Maintaining a clear organisation structure with defined lines of responsibility for executive Directors and senior managers throughout the Group; • Board approval of Group strategy, budgets, major items of capital expenditure and acquisitions; • A comprehensive system of monthly financial reporting to the Board of actual results including comparisons with budgets and explanations of variances; • Controls to limit exposure to loss of asset value by a programme of risk management; and • Review of management accounting and other information by the Board with corrective action being agreed and implemented if any significant weaknesses in internal controls are brought to the Board’s attention. The Group does not have an internal audit department. Responsibility for reviewing areas of greatest risk for the Group during the year and up to the date of this Directors’ Report is carried out by the Group’s senior managers, reporting to the Managing Director. This position is reviewed on a regular basis to determine whether a formal internal audit department would be more cost effective. The Group is intending to apply International Financial Reporting Standards when applicable to AIM. The Group has commenced work to ensure information is available for future disclosure. Going concern The Directors consider that, after making appropriate enquiries and at the time of approving this Annual Report and Accounts, the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors therefore continue to adopt the going concern basis in preparing these Accounts. Remuneration The following disclosure is the Directors’ Remuneration report as required by Section 234B of the Companies Act 1985 (as amended). It also contains additional information required by the Listing Rules of the Financial Services Authority and other relevant information relating to the Group remuneration policy. All tables and associated narrative have been audited by KPMG Audit Plc. Remuneration Committee The Remuneration Committee (‘Committee’) comprises Sir Harry Solomon and Leonard Licht. Although not members of the Committee, on occasions, and for matters not related to their own remuneration packages, the Committee would normally consult the Chairman and Managing Director on proposals relating to the remuneration of the other executive Directors and members of the Group’s senior management team, and they attend meetings of the Committee by invitation. The Committee, on behalf of the Board, determines all elements of the remuneration packages of the executive Directors and would also approve any compensation arrangements resulting from the termination by the Company of a Director’s service contract. The Committee also approves the grant of share options. Non-Executive Directors The remuneration of non-executive Directors is reviewed and determined by the other members of the Board. Remuneration policy The objective of the Remuneration Committee is to reward Directors on a competitive and appropriate basis. In particular, remuneration packages are designed to attract, retain and motivate high quality Directors and senior executives and to reward them by reference to the overall performance of the Group, with the object of obtaining growth in shareholder value. It is the policy of the Committee and FALKLAND ISLANDS HOLDINGS PLC 17 the Board to offer remuneration packages which are appropriate to the experience, qualification and level of responsibility of the appropriate individual. The remuneration of individual executive Directors is determined by reference to that policy and following a review of the performance of each executive Director and taking into account any advice received from independent consultants and data from surveys. Remuneration packages are reviewed on an annual basis. Share options are granted to management in relation to their ability to influence profitability. The Directors confirm that, when determining the Board’s remuneration policy, full consideration was given to the Combined Code. Executive Directors’ remuneration packages The components of the remuneration packages for the executive Directors, as reflected in their service contracts, are as follows: Basic salary This is fixed by the Committee taking into account, from time to time, advice of independent consultants and the market level of positions with similar responsibilities. Basic salaries are normally reviewed on 1 April each year and take account of individual performance during the previous year. Annual bonus Annual bonuses are payable at a level up to 30% of basic salary for the Executive Directors and other senior executives of the Group; the amount of the bonus payable each year depends upon the achievement by the Group of financial targets for the relevant financial period established by the Committee. Any bonuses paid to Bryan McGreal and Anthony Knightley are pensionable since the Board are of the opinion that, as a result of the diversified nature of activities, the influence of the Managing Director and Finance Director on profitability warrants their bonuses being pensionable. David Hudd was paid two bonuses of £30,000 each in recognition of his efforts in respect of the acquisition of PHFC and the flotation of FOGL. Share options Details of the Company’s Executive Share Option Scheme and Employee Share Option Plan can be found on pages 18 and 19 under the heading ‘Directors’ Interests in Shares’, and note 18. Under the Company’s Employee Share Ownership Plan, certain Directors have been granted options to acquire issued ordinary shares in the Company from the trustees of the plan after a three year period. All outstanding options have been granted at not less than market value and have the same performance criteria as options granted under the Company’s Executive Share Option Scheme. Pensions and life assurance Bryan McGreal, John Foster and Anthony Knightley are accruing benefits under a defined contribution pension scheme. The Scheme also covers three other United Kingdom based staff. None of the other Directors received pension benefits from the Group during the year. Other benefits Bryan McGreal’s and Anthony Knightley’s benefits include the provision of a fully expensed company car, health insurance and telephones. The value of the taxable benefits of the executive Directors for the year ended 31 March 2005 are shown in the table below under ‘Taxable Benefits’ Termination, notice periods and retirement by rotation Anthony Knightley has a service contract, terminable by either party subject to one years’ notice. David Hudd has a service contract and he or the Company may terminate the contract by giving six months’ notice. Bryan McGreal retires at the end of the forthcoming Annual General Meeting. John Foster has a service contract, and he or the Company may terminate the contract by giving six months notice. Mr David Hudd, Mr Anthony Knightley and Sir Harry Solomon are the Directors retiring by rotation at the forthcoming Annual General Meeting and, being eligible, they offer themselves for re-election in accordance with the Company’s Articles of Association. Mr John Foster, having been appointed during the year, offers himself for election in accordance with the Company’s Articles of Association. 18 ANNUAL REPORT 2005 Directors’ Report CONTINUED Details of Directors’ remuneration and emoluments The remuneration of the non-executive Directors consists only of annual fees for their services both as members of the Board and of the Committees on which they serve. An analysis of the remuneration and taxable benefits in kind (excluding share options) provided for and received by each Director during the year to 31 March 2005 and in the preceding year is as follows: David Hudd Bryan McGreal John Foster Anthony Knightley Leonard Licht Sir Harry Solomon Salary £’000 Bonuses £’000 Taxable benefits £’000 Pensions £’000 65 84 27 67 20 20 283 60 8 – 10 – – 78 – 15 – 12 – – 27 – 20 6 15 – – 41 2005 Total £’000 125 127 33 104 20 20 429 Directors’ interests in shares As at 31 March 2005, the share options of the executive Directors may be summarised as follows: Share options Scheme Date of grant Number of shares Number of shares Number of shares Number of shares Exercise Exercisable D L Hudd B McGreal J L Foster A M Knightley price from Opening 1 April 2004 A 17 Jan 1998 27 July 2001 B 10 April 2000 27 July 2001 15 Aug 2002 Total Exercised in period Granted in period Closing 31 March 2005 A A B A B – – – – 25,000 3,500 25,000 6,500 81,300 – 81,300 60,000 – – – – (28,500) – – – 81,300 81,300 31,500 31,500 – – – – – – – 5,769 51,923 5,769 51,923 57,962 15,000 £1 10,000 £1.395 £1.50 £1.395 £1.845 £5.20 £5.20 – – – 25,000 (25,000) – – – – – 17 Jan 2001 27 July 2004 10 April 2003 27 July 2004 15 Aug 2005 10 Feb 2005 10 Feb 2005 Scheme A = Executive Share Option Scheme. Scheme B = Employee Share Ownership Plan. 2004 Total £’000 50 124 – 90 20 20 304 Expiry date 16 Jan 2008 26 July 2011 9 April 2010 26 July 2011 14 Aug 2012 9 Feb 2015 9 Feb 2015 FALKLAND ISLANDS HOLDINGS PLC 19 The mid-market price of the Company’s shares at 31 March 2005 was 592.5p and the range during the year was 246.5p to 722.5p. Under the Company’s executive share option scheme, executive Directors and senior executives have been granted options to acquire ordinary shares in the Company after a period of three years from the date of the grant. All outstanding options have been granted at an option price of not less than the market value at the date of the grant. The exercise of options is conditional upon the growth in earnings per share over a period of three consecutive financial years, (starting no earlier than the year in which the option is granted), being greater than the increase in the retail price index over that period plus 6%. The options granted to Mr Hudd and Mr Foster may normally only be exercised if the compound annual growth (CAGR) of the share price of the Company is at least 10% over three years from the date of the grant. If CAGR is 10% the option may only be exercised as to half the shares comprised in it. The option may only be exercised in full if CAGR is at least 20%. For CAGR between 10% and 20%, the option may be exercised in respect of a rising proportion of the shares, calculated on a straight line basis. The following Directors were granted options to subscribe for shares under the Company’s Savings Related Share Option Scheme. The price of the grant is 175p per share and the shares are exercisable on or after 1 April 2006. David Hudd Bryan McGreal Anthony Knightley Ordinary shares Ordinary shares at 31 March 2005 at 31 March 2004 5,400 4,320 5,400 5,400 4,320 5,400 In addition to the share options set out above, the interests of the Directors, their immediate families and related trusts in the shares of the Company according to the register required to be kept pursuant to the Companies Act 1985 were as shown below: David Hudd Bryan McGreal John Foster Anthony Knightley Leonard Licht Sir Harry Solomon Ordinary shares Ordinary shares at 31 March 2005 at 31 March 2004 38,400 46,533 2,000 24,000 791,250 425,027 20,000 22,033 – 6,000 1,191,250 625,027 From 31 March 2005 to 1 June 2005 there were no changes in the above interests. All the above interests were beneficial at the above dates. Bryan McGreal and John Foster were, at the date of this Directors’ Report, deemed to be interested as Discretionary Beneficiaries of the Company’s Executive Share Option Scheme in all the 55,417 ordinary shares of the Company held by the Employee Share Ownership Plan (ESOP). On 13 November 2000, the ESOP waived all future dividends (other than nominal dividends) in respect of the Company’s shares held by the ESOP. Save as mentioned above, no Director had any interest in any share capital of the Company or of any subsidiary. 20 ANNUAL REPORT 2005 Directors’ Report CONTINUED Statement of Directors’ responsibilities Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements the Directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates which are reasonable and prudent; • State whether applicable accounting standards have been followed; and • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors confirm that these financial statements comply with the above requirements. The Directors are also responsible for keeping proper accounting records which disclose, with reasonable accuracy at any time, the financial position of the Company and to enable them to ensure that the accounts comply with the Companies Act 1985. The Directors also have a general responsibility at law for taking such steps that are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. By Order of the Board A M Knightley Secretary 10 June 2005 Charringtons House The Causeway Bishop’s Stortford Hertfordshire CM23 2ER FALKLAND ISLANDS HOLDINGS PLC 21 Independent Auditor’s Report to the Members of Falkland Islands Holdings plc We have audited the financial statements on pages 22 to 42. We have also audited the information in the Remuneration section of the Directors’ Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors are responsible for preparing the Directors’ Report and, as described on page 20, the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Remuneration Section of the Directors’ Report that is described as having been audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with the Group is not disclosed. We read the other information accompanying the financial statements and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the Remuneration Section of the Directors’ Report that is described as having been audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the Remuneration Section of the Directors’ Report that is described as having been audited. Opinion In our opinion: • the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 March 2005 and of the profit of the Group for the year then ended; and • the financial statements and the Remuneration Section of the Directors’ Report that is described as having been audited have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor 10 June 2005 Nottingham 22 ANNUAL REPORT 2005 Group Profit and Loss Account FOR THE YEAR ENDED 31 MARCH 2005 Notes 2 Turnover Cost of sales Gross profit 3 4 Administrative expenses Other operating income Operating profit Net interest income/(expense) Profit on ordinary activities before taxation Continuing operations £’000 11,468 (7,910) Acquisitions £’000 Total 2005 £’000 Total 2004 £’000 1,286 (798) 12,754 (8,708) 11,082 (7,762) 3,558 488 4,046 3,320 (3,091) 287 754 7 (354) 4 138 (1) (3,445) (2,743) 291 892 6 283 860 (13) 761 137 898 847 5 Taxation (247) (62) (309) (255) Profit on ordinary activities after taxation 6 Dividends Retained profit 7 Earnings per share Basic Diluted Basic before amortisation of goodwill 6 Dividend per ordinary share 514 75 589 592 (520) (351) 69 241 8.0p 7.9p 8.9p 9.7p 9.4p 9.7p 6.0p 5.75p All results are derived from continuing operations in the current and preceding years. There were no recognised gains or losses in either the current or preceding year other than those disclosed in the profit and loss account. Group Balance Sheet AT 31 MARCH 2005 Notes 9 10 11 Fixed assets Intangible assets Tangible assets Investment in joint venture – share of gross assets 11 Other investments Current assets 12 Stocks 13 Debtors due within one year 13 Debtors due after one year Cash at bank and in hand 14 Creditors: amounts falling due within one year (5,921) Net current assets Total assets less current liabilities 15 Creditors: amounts falling due after more than one year 17 Provisions for liabilities and charges Net assets Capital and reserves 18 Called up share capital 19 Share premium account 19 Other reserves 19 19 20 Reserve for own shares Profit and loss account Equity shareholders’ funds FALKLAND ISLANDS HOLDINGS PLC 23 2005 2004 £’000 £’000 £’000 £’000 3,308 1,788 24 1,812 914 6,034 4,136 8,501 – 900 13,537 113 13,650 (831) (1,895) 10,924 838 7,061 703 (83) 2,405 10,924 3,079 1,336 42 1,378 1,183 5,640 (4,798) 89 3,552 189 – 3,830 842 4,672 – (1,157) 3,515 617 54 703 (112) 2,253 3,515 The financial statements were approved by the Board of Directors on 10 June 2005 and were signed on its behalf by: B McGreal Managing Director A M Knightley Finance Director 24 ANNUAL REPORT 2005 Company Balance Sheet AT 31 MARCH 2005 Notes Fixed assets 11 Investments Current assets 13 Debtors 2005 2004 £’000 £’000 £’000 £’000 15,997 8,000 1,509 14 Creditors: amounts falling due within one year (1,463) Net current assets/(liabilities) Total assets less current liabilities 15 Creditors: amounts falling due after more than one year Net assets Capital and reserves 18 Called up share capital 19 Share premium account 19 Other reserves 19 19 Reserve for own shares Profit and loss account 20 Equity shareholders’ funds 770 (2,057) (1,287) 6,713 – 6,713 617 54 5,389 (112) 765 6,713 46 16,043 (785) 15,258 838 7,061 5,389 (83) 2,053 15,258 The financial statements were approved by the Board of Directors on 10 June 2005 and were signed on its behalf by: B McGreal Managing Director A M Knightley Finance Director FALKLAND ISLANDS HOLDINGS PLC 25 Group Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2005 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Amortisation of goodwill Depreciation charges Increase in stocks (Increase)/decrease in debtors Increase in creditors and provisions Net cash inflow from operating activities Cash flow statement Cash flow from operating activities Returns on investments and servicing of finance Interest received Interest paid Taxation UK Corporation tax paid Overseas taxation paid Capital expenditure and financial investment Purchase of tangible fixed assets Purchase of investments Receipts from sale of tangible fixed assets Acquisitions Investment in Joint Ventures Investment in subsidiary undertaking Equity dividends paid Cash (outflow)/inflow before financing Financing Repayment of secured loan Issue of ordinary share capital New secured loan Sale of own shares Share options exercised (Decrease)/increase in cash in the year 2005 £’000 892 65 292 (229) (256) 13 777 £’000 777 16 (273) 2004 £’000 860 – 226 (221) 337 542 1,744 2004 £’000 £’000 1,744 (13) (308) 12 (25) (101) (207) (503) (26) – (1,721) (529) (83) – (250) – – – – (83) (335) 476 (250) 226 (5,556) (372) (7,129) 6,403 (726) 2005 £’000 47 (31) (169) (104) (1,243) (622) 144 – (5,556) (279) 5,472 1,000 112 98 26 ANNUAL REPORT 2005 Group Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2005 – CONTINUED Reconciliation of net cash flow to movement in net funds (Decrease)/increase in cash in the year Cash (inflow)/outflow from (increase)/decrease in debt Change in net debt resulting from cash flows Change in net debt resulting from acquisitions Net cash at start of year Net cash at end of year Analysis of changes in net funds Cash at bank and in hand Overdraft Debt due within one year Debt due after one year 2005 £’000 (726) (848) (1,574) 209 933 (432) Cash flows £’000 (698) (28) (726) (97) (751) (1,574) 2004 £’000 226 250 476 – 457 933 Acquisitions As at 31 March £’000 429 (52) 377 (88) (80) 209 2005 £’000 914 (80) 834 (435) (831) (432) As at 31 March 2004 £’000 1,183 – 1,183 (250) – 933 FALKLAND ISLANDS HOLDINGS PLC 27 Notes to the Financial Statements FOR THE YEAR ENDED 31 MARCH 2005 1 Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. Basis of accounting The financial statements have been prepared under the historical cost accounting rules and in accordance with applicable accounting standards. Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings made up to 31 March 2005 and comparatives for the year ended 31 March 2004. The financial statements include the appropriate share of the results and net assets of its joint venture and associates. The results of subsidiary undertakings, joint ventures and associates acquired or disposed of during the period are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. Unless otherwise stated, the acquisitions method of accounting has been adopted. Entities in which the Group holds an interest on a long term basis and are jointly controlled by the Group with one or more other parties under contractual agreement, are treated as joint ventures and are accounted for using the gross equity method. Purchased goodwill arising on consolidation in respect of acquisitions before 1 April 1998, (the date from which FRS 10 ‘Goodwill and Intangible Assets’ was adopted) was written off to reserves in the year of acquisition. When a subsequent disposal occurs any related goodwill previously written off to reserves is written back through the profit and loss account as part of the profit or loss on disposal. Purchased goodwill arising on consolidation arising from acquisitions after 1 April 1998 is written off over its estimated useful life in accordance with FRS 10. In the Company’s financial statements, investments in subsidiary undertakings are stated at cost. Joint arrangements Where the Group participates in joint arrangements that are not entities, it accounts for their own assets, liabilities and cash flows, measured according to the terms of the agreements governing the arrangements. Employee share awards The estimated cost of awards is charged to profit over the period to the date of expected vesting or the performance period, as appropriate. The estimated cost of awards is the market value of the shares awarded or the intrinsic value of options awarded (being the difference between the exercise price and the market value of at date of grant, measured at the granting of the award). Where shares are bought on markets to satisfy the delivery of shares on vesting, the cost of these share investments is reported within reserves, in accordance with UITF Abstract 38 ‘Accounting for ESOP trusts’. Depreciation Freehold land is not depreciated. Depreciation is provided by equal annual instalments to reduce the cost of fixed assets to their residual value over their estimated useful working lives. The principal annual rates are: Freehold buildings Long leasehold land and buildings Vehicles, plant and equipment Ships Deferred taxation 2 – 5% 2% 10 – 25% 3.3% The charge for taxation is based on the profit for the period and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19 ‘Deferred tax’. Exploration expenditure Exploration expenditure is accounted for in accordance with the full cost method, as detailed in the Oil and Gas Statement of Recommended Practice. Exploration expenditure is initially capitalised as an intangible asset. When proven reserves of oil and natural gas are determined and a development is sanctioned, the relevant expenditure will be transferred to tangible production assets. Exploration expenditure determined as unsuccessful is written off to the profit and loss account. 28 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED Stocks Stocks are stated at the lower of cost and net realisable value including cost of transportation to the Falkland Islands. Turnover Turnover represents the amounts invoiced to third parties excluding value added tax. Pensions Contributions to the defined benefit schemes in which the Group participates are charged to the profit and loss account so as to spread the regular cost together with any adjustments arising on actuarial valuations over the average service life of employees. The provisions of FRS 17 ‘Retirement benefits’ are being adopted in accordance with the transitional rules provided therein. Contributions to defined contribution schemes are charged to the profit and loss account as incurred. Leased assets – as lessee Rentals in respect of all operating leases are charged to the profit and loss account on a straight line basis over the lease term. – as lessor Assets under hire purchase agreements are shown in the balance sheet under current assets and are stated at the value of the net investment in the agreements. The income from such agreements is credited to the profit and loss account each year so as to give a constant rate of return on the funds invested. Foreign currencies Transactions in foreign currencies are recorded using the rates of exchange ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated using the relevant rates of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account. Where transactions are hedged with foreign currency contracts, the transactions are translated at the contracted rate for presentation in the year end balance sheet. 2 Segmental information The table sets out information for both of the Group’s industry segments and geographic areas of operation. General trading Ferry services in the Falkland Islands in the United Kingdom Total 2005 £’000 2004 £’000 2005 £’000 2004 £’000 2005 £’000 2004 £’000 Turnover 11,468 11,082 1,286 Segment operating profit before Head office costs and goodwill amortisation 1,287 1,143 203 Segment profit before taxation, Head office costs and goodwill amortisation 1,294 1,130 202 Head office costs Goodwill amortisation Group profit before taxation – – – 12,754 11,082 1,490 1,143 1,496 1,130 (533) (65) 898 (283) – 847 Net assets 7,783 3,515 3,141 – 10,924 3,515 FALKLAND ISLANDS HOLDINGS PLC 29 3 Operating profit Operating profit on ordinary activities is stated after charging: Depreciation Goodwill amortisation Auditors remuneration – for audit services (Company £15,000 (2004: £15,000)) – for non audit services Operating lease rentals – vehicles – other leases 2005 £’000 292 65 32 13 21 59 2004 £’000 226 – 30 – 22 30 Of the non-audit related fees paid to the auditor, £7,000 related to the acquisition. The balance relates to general advisory work. 4 Net interest expense Interest payable on bank loans Interest receivable 5 Taxation The tax charge based on profit for the period comprises: UK corporation tax at 30% Less double taxation relief Overseas taxation at 25% (2004: 32.5%) Adjustments in respect of prior periods Total current tax Deferred taxation 2005 £’000 (41) 47 6 2005 £’000 226 (149) 77 231 (31) 277 32 309 2004 £’000 (25) 12 (13) 2004 £’000 227 (106) 121 158 (24) 255 – 255 30 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 5 Taxation CONTINUED Factors affecting the tax charge for the current period: The current tax charge for the period is higher (2004: lower) than the standard rate of corporation tax in the Falkland Islands 25% (2004: 32.5%). The difference can be explained below: Current tax reconciliation: Profit on ordinary activities before tax Current tax at 25% (2004: 32.5%) Expenses not deductible for taxation purposes Depreciation for the period in excess of capital allowances Marginal rate on overseas tax earnings Adjustments to tax charge in respect of previous periods Total current tax 6 Dividend Proposed final dividend 6.0p (2004: 5.75p) 2005 £’000 898 225 15 36 32 (31) 277 2005 £’000 520 2004 £’000 847 275 16 – (12) (24) 255 2004 £’000 351 7 Earnings per share Earnings per share has been calculated on profit after tax of £589,000 (2004: £592,000) and based on the weighted average number of shares in issue, excluding shares held in the Employee Share Ownership Plan, of 7,336,298 (2004: 6,095,037). The fully diluted earnings have been further adjusted by the dilutive outstanding share options resulting in a weighted average number of shares of 7,427,648 (2004: 6,322,547). Allotted called up and fully paid – Ordinary shares of 10p each Less: shares held under ESOP (note 19) Maximum dilution re share options (including ESOP) Diluted weighted average number of ordinary shares in issue 2005 Number 7,391,715 (55,417) 7,336,298 91,350 7,427,648 2004 Number 6,170,037 (75,000) 6,095,037 227,510 6,322,547 FALKLAND ISLANDS HOLDINGS PLC 31 8 Employment costs including Directors Wages and salaries Social security costs Other pension costs 2005 £’000 2,423 128 187 2,738 2004 £’000 2,066 83 163 2,312 Details of Directors’ remuneration are included within the Directors’ Report, under the headings ‘Remuneration’ and ‘Details of Directors’ remuneration and emoluments’ on pages 18 and 19. Average number of persons employed: United Kingdom Falkland Islands 9 Intangible assets As at 1 April 2004 On acquisition Transferred to investments (note 11) Amortised to profit and loss account Balance at 31 March 2005 2005 53 85 138 Goodwill £’000 – 4,201 – 4,201 (65) 4,136 2004 8 112 120 Expedition expenditure £’000 89 – (89) – – – The exploration expenditure was incurred by The Falkland Hydrocarbon Consortium, a joint arrangement that is not an entity in which the Group had a 20% interest. The expenditure related to offshore exploration to the South and East of the Falkland Islands. During the year the interest in The Falkland Hydrocarbon Consortium was exchanged for an 18.1% interest in Falkland Oil and Gas Limited, a company listed on the Alternative Investment Market. This interest is included in Investments, see note 11. 32 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 10 Tangible fixed assets of the Group Freehold land and buildings £’000 Leasehold land and buildings £’000 Vehicles plant and equipment £’000 Ships £’000 Cost: At 1 April 2004 Acquisitions Additions Disposals At 31 March 2005 Accumulated depreciation: At 1 April 2004 Charge for the period Disposals At 31 March 2005 Net book value: At 31 March 2005 At 31 March 2004 3,251 1,298 195 – 4,744 619 86 – 705 4,039 2,632 342 – 2,047 Total £’000 5,640 4,142 1,243 (166) 453 115 (22) 2,593 10,859 1,433 2,088 183 (22) 292 (22) 1,594 2,358 2,391 933 (144) 3,180 – 16 – 16 3,164 – 999 614 8,501 3,552 – – – 342 36 7 – 43 299 306 Included in freehold land and buildings is land stated at £948,000 (2004: £782,000) which is not depreciated. The Company has no tangible fixed assets. 11 Fixed asset investments As at 1 April 2004 Additions in the year Transfers from joint venture to ‘other investments’ Transferred from intangible assets (note 9) As at 31 March 2005 Group Investment in joint venture Other and associate investments £’000 189 – (189) – – £’000 – 622 189 89 900 Total £’000 189 622 – 89 900 The investments are shown at cost at the balance sheet date. The joint venture investment in the opening balance sheet is Falkland Gold and Minerals Limited (FGML), a company incorporated in the Falkland Islands. At the beginning of the year the Company had 22.5% of the issued ordinary shares of £1 each. The main activity of FGML was exploration for minerals on the Falkland Islands. In addition to FGML, in June 2004, the Company transferred its interest in an oil exploration joint arrangement, The Falkland Hydrocarbon Consortium, into ownership of 28.9% of the issued ordinary shares of a newly formed company, Falkland Oil and Gas Limited (FOGL), a company incorporated in the United Kingdom. The main activity of FOGL is offshore exploration for oil and gas in the Falkland Islands. Subsequently both FGML and FOGL have been admitted to the Alternative Investment Market. In addition to the transfer of the previous investments, the Group acquired £0.6 million of shares for cash in these entities in the year. As a result of the placings the effective equity interest held by The Falkland Islands Company Limited in both has reduced. At the year end the Company had a 14.4% interest in the issued share capital of FGML and an 18.1% interest in the issued share capital of FOGL. The market value of these investments at 31 March 2005 was: Falkland Gold and Minerals Limited £4.3 million and Falkland Oil and Gas Limited £17.1 million. 11 Fixed asset investments CONTINUED As at 1 April 2004 Acquired during the year Disposed of during the year As at 31 March 2005 FALKLAND ISLANDS HOLDINGS PLC 33 Company Investment in Group undertakings £’000 8,000 8,425 (428) 15,997 During the year the Company acquired a 100% interest in The Portsmouth Harbour Ferry Company PLC (PHFC), see note 23. During the year the Company also purchased investments in FOGL and FGML for £900,000 from a Group company. The disposal relates to a transfer of an investment in a subsidiary company to a fellow subsidiary company. Details of subsidiary undertakings which have all been consolidated in these financial statements are as follows: Description of shares held Percentage of shares held Principal activity The Falkland Islands Ordinary shares of £1 100% General trading in the Falkland Islands Company Limited Preference shares of £10 The Falkland Islands Ordinary shares of £1 100% Arranging the purchase and Trading Company Limited shipment of goods to the Falkland Islands Darwin Shipping Limited Ordinary shares of £1 100% indirect Shipping services between the United Kingdom and the Falkland Islands The Portsmouth Harbour Ordinary shares of £1 100% Ferry services and travel agency in the Ferry Company PLC Portsea Harbour Company Ordinary shares of £1 Limited Clarence Marine Ordinary shares of £1 Engineering Limited Gosport Ferry Limited Ordinary shares of £1 Cobham Travel Service Ordinary shares of £1 Limited 12 Stocks Goods for resale United Kingdom Statutory harbour authority Marine and engineering maintenance Passenger ferry operator Travel Agency 100% indirect 100% indirect 100% indirect 100% indirect 2005 £’000 3,308 Group 2004 £’000 3,079 34 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 13 Debtors Group Company 2005 £’000 2004 £’000 2005 £’000 2004 £’000 Amounts falling due within one year: Trade debtors Amounts owed by subsidiary undertakings Hire purchase receivables Corporation tax Other debtors Prepayments and accrued income Amounts falling due after more than one year: Hire purchase receivables 1,310 1,071 – 86 33 38 321 1,788 – 100 – 50 115 – 1,315 – 168 26 – 1,336 1,509 24 42 – 1,812 1,378 1,509 – 756 – – 14 – 770 – 770 The cost of assets acquired for the purpose of letting under hire purchase agreements by the Group during the period amounted to £125,000 (2004: £124,000). The aggregate rentals receivables during the period in respect of hire purchase agreements were £190,000 (2004: £214,000). 14 Creditors: amounts falling due within one year Bank loans and overdrafts (note 16) Trade creditors Other creditors including taxation and social security Corporation tax Accruals and deferred income Dividends payable Unsecured loan notes (note 16) Group Company 2004 £’000 250 3,185 150 282 576 355 – 2005 £’000 480 – 178 – 260 502 43 2004 £’000 1,575 – 18 – 109 355 – 4,798 1,463 2,057 2005 £’000 472 2,506 598 427 1,373 502 43 5,921 Within other creditors is tax and social security of £11,000 (2004: £13,000). There are fixed and floating charges over the assets of the Company in respect of bank loans and overdrafts, shown in notes 14 to 16. 15 Creditors: amounts falling due after more than one year Bank loans Unsecured loan notes Group Company 2005 £’000 746 85 831 2004 £’000 – – – 2005 £’000 700 85 785 2004 £’000 – – – FALKLAND ISLANDS HOLDINGS PLC 35 16 Borrowings, derivatives and other financial instruments The bank loans, overdrafts and unsecured loan notes are repayable as follows: Within one year Between one and two years Between two and five years Cash/(overdraft) Net (debt)/funds Group Company 2005 £’000 2004 £’000 2005 £’000 2004 £’000 (515) (389) (442) (1,346) 914 (432) (250) – – (250) 1,183 933 (343) (343) (442) (1,128) (180) (1,308) (250) – – (250) – (250) The Group’s financial instruments comprise cash and borrowings and arise directly from its operations. The principal function of these financial instruments is to fund the Group’s operations. Cash at bank is money on call or short term deposit. This together with cash in hand is used to fund the day-to-day operations. The Group has not utilised its £1.6 million overdraft facility. Cash Company Cash comprises: Short term money markets Cash held in sterling accounts Cash held in foreign currency accounts 2005 £’000 250 610 54 914 2004 £’000 937 158 88 1,183 Interest rate risk The Group’s trading operations are financed through a mixture of retained profits, liquid resources and a bank loan. The interest on bank loans is 1.6% per annum above LIBOR. The interest on the bank overdraft facility is 1.5% per annum above HSBC Bank plc base rate in respect of any utilisation. Short term sterling money market deposits attract interest at commercial rates. Foreign currency risk The Group’s present exposure to foreign currency risk is limited. It is policy to purchase foreign currency forward in order to match purchases as and when they occur. At 31 March 2005 the Group had contracts outstanding to purchase foreign currency amounting to £nil (2004: £nil). Fair value of financial instruments There is no material difference between the book values and the fair values of financial instruments. 36 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 17 Provisions for liabilities and charges Pensions Deferred tax As at 31 March Pensions As at 1 April Acquisition Charge to profit and loss account Less pensions paid in the period Balance at 31 March 2005 £’000 1,383 512 1,895 2005 £’000 1,057 290 120 (84) 1,383 2004 £’000 1,057 100 1,157 2004 £’000 1,030 – 113 (86) 1,057 The acquisition relates to a closed defined benefit scheme held within the new Group subsidiary, The Portsmouth Harbour Ferry Company PLC. An actuarial report at 31 March 2005 valued the deficit in this scheme at £290,000. The current year end is the only year in which actuarial information has been made available, therefore no historical data has been disclosed. The major assumptions in this FRS 17 valuation were: Rate of increase in salaries Rate of increase in pensions payments Discount rate applied to scheme liabilities Inflation rate 2005 % 3.5 3.0 6.5 2.5 The assumptions used by the actuary are those indicated by management from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. Scheme liabilities The present value of the scheme liabilities which are derived from cash flow projections over long periods and thus inherently uncertain were: Present value of scheme liabilities Related deferred tax assets Total present liability (net of deferred tax) Amount provided (net of deferred tax) Unprovided pension liability Value at 2005 £’000 (290) 87 (203) 203 – 17 Provisions for liabilities and charges CONTINUED Movement in deficit during the year: Deficit in scheme at beginning of year (net of deferred tax) Contributions paid Other finance cost Deficit in the scheme at end of year (net of deferred tax) FALKLAND ISLANDS HOLDINGS PLC 37 2005 £’000 (281) 3 (12) (290) If FRS 17 had been fully adopted in these financial statements the pension costs for defined benefit schemes would have been: Analysis of amounts included in other finance costs: Interest on pension scheme liabilities 2005 £’000 (12) The Falkland Islands Company Limited operates a defined benefit pension scheme for certain employees which is unfunded and was closed to new members in 1988. Benefits are only payable on leaving service of the Company at normal retirement age. The provision in the financial statements is based on the latest valuation undertaken by a professionally qualified actuary, Lane Clark and Peacock LLP, which was carried out on 31 March 2005 using the attained age method, which estimates the average annual cost of all future years service. The assumptions which have the most significant effect on the results of the valuation are: Interest rate Salary increase rate Pension increase rate Discount rate Inflation rate FRS 17 – Transitional disclosures Per annum % 6.5 3.5 3.0 6.5 2.5 Whilst the Company continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 ‘Accounting for Pensions Costs’, under FRS 17 ‘Retirement Benefits’ the following transitional disclosures are required. The valuation was updated by the actuary on an FRS 17 basis as at 31 March 2005, 31 March 2004, 31 March 2003 and 31 March 2002. The major assumptions in this valuation were: Rate of increase in salaries Rate of increase in pensions payments Discount rate applied to scheme liabilities Inflation rate 2005 % 3.5 3.0 6.5 2.5 2004 % 3.5 3.0 6.5 2.5 2003 % 3.5 3.0 6.5 2.5 2002 % 4.5 3.0 6.5 2.5 The assumptions used by the actuary are those indicated by management from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. 38 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 17 Provisions for liabilities and charges CONTINUED Scheme liabilities – The present value of the scheme liabilities which are derived from cash flow projections over long periods and thus inherently uncertain were: Present value of scheme liabilities Related deferred tax assets Total present liability (net of deferred tax) Amount provided (net of deferred tax) Unprovided pension liability Value at Value at Value at Value at 2005 £’000 2004 £’000 2003 £’000 2002 £’000 (1,464) (1,386) (1,435) (1,460) 475 (989) 738 (251) 450 (936) 714 (222) 467 (968) 684 (284) 2004 £’000 (968) (19) 113 (94) (17) 49 (936) 470 (990) 673 (317) 2003 £’000 (990) (20) 114 (94) (3) 25 (968) The amount of this unprovided pension liability would have a consequential effect on reserves. Movement in deficit during the year: Deficit in scheme at beginning of year (net of deferred tax) Current service cost Contributions paid Other finance cost Deferred tax movement Actuarial (loss)/gain Deficit in the scheme at end of year (net of deferred tax) 2005 £’000 (936) (20) 120 (91) 25 (87) (989) If FRS 17 had been fully adopted in these financial statements the pension costs for defined benefit schemes would have been: Analysis of pension cost in arriving at operating profit: Current service cost Analysis of amounts included in other finance costs: Interest on pension scheme liabilities Analysis of amount recognised in statement of total recognised gains and losses: 2005 £’000 20 91 2004 £’000 19 94 2003 £’000 20 94 Actuarial (loss)/gains on changes in assumptions recognised in statement of total recognised gains and losses (87) 49 25 The Company operates a defined contribution scheme to which in the year to 31 March 2005, the Company contributed £55,000 (2004: £49,000). There were no outstanding contributions payable at the year end. FALKLAND ISLANDS HOLDINGS PLC 39 17 Provisions for liabilities and charges CONTINUED Deferred taxation Provision for deferred tax liability Balance at 31 March Falkland Islands Company Deferred tax asset relating to pension scheme Deferred tax liability relating to accelerated capital allowances Portsmouth Harbour Ferry Company Deferred tax asset relating to pension scheme Deferred tax liability relating to accelerated capital allowances Total deferred tax provision 18 Called up share capital Authorised: 10,000,000 (2004: 8,250,000) Ordinary shares of 10p each Allotted, called up and fully paid: 8,379,480 (2004: 6,170,037) Ordinary shares of 10p each 2005 £’000 512 512 2005 £’000 (283) 383 100 (87) 499 412 512 2005 £’000 1,000 838 Group and Company 2004 £’000 100 100 2004 £’000 (277) 377 100 – – – 100 2004 £’000 825 617 A total of 320,000 shares were issued during the year as part of the consideration in the acquisition of The Portsmouth Harbour Ferry Company PLC. A further 1.8 million shares were issued for cash to fund this acquisition. As a result of these transactions, share premium was uplifted by £7 million (note 19). A total of 160,075 (2004: 251,300) Executive share options had been granted at the balance sheet date, all have conditions attached as disclosed in the Executive share options scheme section of the Directors’ Report under the heading ’Remuneration’, page 18. In addition, there were 84,132 (2004: 89,864) share options outstanding under the Company’s Saving Related Share Option Scheme at 31 March 2005. These options have an exercise price of 175p and are exercisable on or after 1 April 2006. 40 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 19 Reserves Group Share premium account £’000 Other reserves £’000 Reserves for own shares £’000 Profit and loss account £’000 Total £’000 At 1 April 2004 54 703 (112) 2,253 2,898 Premium on shares issued in the year, net of expenses Retained profit for the year Sale of own shares At 31 March 2005 7,007 – – – – – – – 29 – 69 83 7,007 69 112 7,061 703 (83) 2,405 10,086 Cumulative goodwill written off to reserves in prior periods was £4,686,000. This goodwill arose on a 100% share-for-share exchange. The acquisition method of accounting was adopted and the goodwill was written off against other reserves. On 31 March 2000, an Employee Share Ownership Plan was established. At 31 March 2005 the plan held 55,417 (2004: 75,000) ordinary shares at an average cost of £83,000 (2004: £112,000). The market value of the shares at 31 March 2005 was £331,000 (2004: £171,000). Options described in the Directors’ Report over these shares are exercisable at prices of 139.5p, 150p and 520p from 2003 to 2011. Shares held under ESOP have had their rights to dividends waived, as in prior years. Company Share premium account £’000 Other reserves £’000 Reserves for own shares £’000 Profit and loss account £’000 Total £’000 At 1 April 2004 54 5,389 (112) 765 6,096 Premium on shares issued in the year, net of expenses Retained profit for the year Sale of own shares At 31 March 2005 7,007 – – – – – 7,061 5,389 – – 29 (83) – 1,205 83 2,053 7,007 1,205 112 14,420 A profit of £1,725,000 (2004: £444,000) has been dealt with in the account of the Parent Company. As permitted by Section 230 of the Companies Act 1985, the Company has not presented its own profit and loss account. FALKLAND ISLANDS HOLDINGS PLC 41 20 Reconciliation of movement in shareholders’ funds Profit for the financial year Dividends Issue of shares Sale of own shares Net addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds Group Company 2005 £’000 589 (520) 7,228 112 7,409 3,515 10,924 2004 £’000 592 (351) – – 241 3,274 3,515 2005 £’000 1,725 (520) 7,228 112 8,545 6,713 15,258 2004 £’000 444 (351) – – 93 6,620 6,713 21 Operating lease commitments Annual commitments under non-cancellable operating leases are as follows: Group 2005 2004 Land and buildings £’000 Other operating leases £’000 Land and buildings £’000 Other operating leases £’000 – 30 26 56 3 21 – 24 – 30 – 30 8 14 – 22 Operating leases which expire: Within one year In the second to fifth years inclusive Over five years The Company had no operating lease commitments. 22 Capital commitments Contracted amounts not provided in these financial statements are: 130 16 – – Group Company 2005 £’000 2004 £’000 2005 £’000 2004 £’000 42 ANNUAL REPORT 2005 Notes to the Financial Statements CONTINUED 23 Purchase of subsidiary Net assets acquired Tangible fixed assets Debtors Taxation recoverable Cash at bank and in hand Creditors Bank overdrafts Loans and finance leases Deferred taxation Net assets acquired Goodwill Satisfied by Shares allotted Cash Loan notes Fair value Book value adjustments £’000 £’000 Total £’000 3,698 146 133 429 (570) (52) (168) (452) 444 – (116) – (240) – – 72 4,142 146 17 429 (810) (52) (168) (380) 3,324 4,201 7,525 1,658 5,739 128 7,525 The fair value adjustments made are as follows: • a revaluation of the tangible fixed assets of the subsidiary, as confirmed by a professional valuation. The revaluation was in respect of land and buildings; • provision for taxation payable; • provision for a deficit on a defined benefit pension scheme as calculated by a qualified actuary (note 17); and • deferred taxation in respect of the deficit on the defined benefit pension scheme. Directors and Corporate Information FALKLAND ISLANDS HOLDINGS PLC 43 Directors David Hudd Chairman Bryan McGreal Managing Director John Foster Deputy Managing Director Anthony Knightley Finance Director Leonard Licht* Sir Harry Solomon* *Non-executive Directors Web site www.fihplc.com Corporate information Company Secretary and Registered Office Anthony Knightley, Charringtons House, The Causeway, Bishop’s Stortford, Hertfordshire CM23 2ER Telephone: 01279 461630 Fax: 01279 461631 Email: admin@fihplc.com Registered number 3416346 Stockbroker KBC Peel Hunt 111 Old Broad Street, London EC2N 1PH Solicitors Addleshaw Goddard 100 Barbirolli Square, Manchester M2 3AB Bircham Dyson Bell 50 Broadway, Westminster, London SW1H 0BL Banker HSBC Bank plc Falkland Islands Office Crozier Place, Stanley, Falkland Islands, South Atlantic Telephone: 00 500 27600 Fax: 00 500 27603 Email: fic@horizon.co.fk Web site: www.the-falkland-islands-co.com Auditor KPMG Audit Plc St Nicholas House, Park Row, Nottingham NG1 6FQ Registrar Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU Financial PR College Hill 78 Cannon Street, London EC4N 6NN Nominated Adviser Dawnay, Day Corporate Finance Limited 18 North Street, Bishop’s Stortford, Hertfordshire CM23 2LP 8-10 Grosvenor Gardens, London SW1W 0DH Senior Staff in the Falkland Islands Senior Staff at Portsmouth Harbour Ferry Company Roger Spink Senior Director and General Manager Mike Killingley Non-executive Chairman David Castle Retailing Director Captain Paul Bryant General Manager Ana Crowie Financial Controller Printed by Royle Corporate Print, London www.fihplc.com
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