Falkland Islands Holdings plc Annual Report 2006 Contents Financial Highlights Chairman’s and Managing Director’s Review of Operations Financial Review 1 2 8 10 Group Activities 13 Board of Directors and Secretary 14 Directors’ Report 23 Independent Auditor’s Report 24 Group Profit and Loss Account 25 Group Balance Sheet 26 27 Company Balance Sheet Group Cash Flow Statement 28 Consolidated Statement of Total Recognised Gains and Losses 29 Notes to the Financial Statements 48 Directors and Corporate Information Financial Highlights Turnover Profit before tax Underlying profit before tax, goodwill amortisation, exceptional items and profit on sale of fixed asset investments Basic earnings per share before goodwill amortisation and exceptional items as above Dividend per share Cash flow from operations FALKLAND ISLANDS HOLDINGS PLC 1 2006 £’000 2005 £’000 Change % 15,736 12,754 23 240 60 907 972 9.1p 39.6 6.0p 8.3 777 114 3,088 1,560 12.7p 6.5p 1,665 Net asset value per share at cost 153.3p 128.8p 19.0 Net asset value per share with investments in FOGL and FGML shown at market value 400.2p 373.4p 7 The investments in Falkland Oil and Gas (FOGL) and Falkland Gold and Minerals (FGML) are shown in the financial statements at their cost of £2.6 million. Both companies are listed on AIM and the market value of the Group shareholdings at 31 March 2006 was £23.3 million. Turnover (£’000) 15,736 11,814 11,447 11,082 12,754 Profit before tax (£’000) 3,088 1,003 1,025 847 907 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Basic earnings per share (pence) before goodwill amortisation and exceptional items 12.7 11.80 10.90 9.70 9.10 Dividend per share (pence) 6.50 6.00 5.50 5.75 5.00 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2 ANNUAL REPORT 2006 Chairman’s and Managing Director’s Review of Operations Overview Basic earnings per share rose to 32.6 pence (2005: 8.2p). We are pleased to report that the year to 31 March 2006 Basic earnings per share on underlying profits increased has been an encouraging year for your Company and 40% to 12.7 pence per share (2005: 9.1p). Further record levels of profitability have been achieved as the information on the Group’s financial performance is Group successfully consolidated its position following the contained in the enhanced Director’s Report on pages strategic expansion seen in the prior year. The Group now 8 to 22. has two solid cash generative businesses providing essential services to local communities. The Falkland Operations operations produced a satisfactory result despite subdued Falkland Islands levels of activity in the Islands, while the Portsmouth Retail sales on the Islands were helped by the introduction Harbour Ferry Company (“PHFC”) benefited from the of a new in-store delicatessen and coffee shop and maritime festivals held in 2005. further expansion of the product range. The steady increase in the number of cruise ship visitors visiting Falkland Oil and Gas (“FOGL”) and Falkland Gold and Stanley also helped to boost revenues at the Capstan gift Minerals (“FGML”) in which the Company has significant shop. However, in contrast the Group’s DIY retailing shareholdings of 16.3% and 14.4% respectively, businesses suffered from the slow down in the local continued their exploration efforts. FOGL raised a further economy and a reduction in business confidence resulting £10 million from investors in May 2005 and we from continued low levels of squid catches at the start of subscribed £2 million in that placing. We took the the year. opportunity in February 2006 of recouping that cash outlay when we sold 1.8 million shares generating After a good year in 2005, the Land Rover dealership had proceeds of £2.4 million and a profit of £2.1 million. This a more difficult year and the numbers of vehicle sales fell transaction increased the Group’s distributable reserves although a contract to modify existing MoD vehicles and provides additional financial flexibility. At the end of helped the dealership achieve satisfactory results. The the year the Group had net cash balances of £0.3 million Upland Goose hotel faced fierce challenges from newly (2005: borrowings £0.4 million) and the market value of refurbished competition in Stanley and produced a its two investments was £23.3 million, equivalent to disappointing result, accordingly we have taken the 278 pence per FIH share, compared with book cost of decision to reduce its carrying value by £0.4 million. £2.6 million. On a more positive note the Group’s insurance agency The Group now has a solid operating platform and a continued to make steady progress, consolidating its strong cash position from which to move forward and the reputation for high levels of customer service and net exploration investments will provide an exceptional return rental income from FIC’s portfolio of 35 commercial and in the event of a successful outcome. Your Board will seek residential properties in Stanley also moved ahead. to continue to deliver value to shareholders and as such is Darwin Shipping was able to maintain its contribution proposing to increase the annual dividend by 8.3% from despite rising freight and fuel costs by changing from 6p to 6.5p. Financial summary chartering its own vessels to taking space on Ministry of Defence Supply vessels which give the added advantage of more frequent vessel sailings per year, giving improved In the year to 31 March 2006 turnover rose by 23% service levels and choice for customers. to £15.7 million (2005: £12.8 million) and the profit before taxation including exceptional items increased to Port Services continued to make an important £3.1 million (2005: £0.9 million). Underlying profits contribution although profit levels fell slightly in the face before the amortisation of goodwill and exceptional of local competition. With poor squid catches in the early items, including a first full year contribution from part of the financial year the Fishing Agency business only PHFC, rose by 61% to £1,560,000 (2005: £972,000). made a modest contribution. However the Agency team FALKLAND ISLANDS HOLDINGS PLC 3 “ 2005/6 saw a steady increase in the number of cruise ship visitors visiting Stanley. ” Central Stanley showing West Store supermarket and Capstan gift shop Capstan gift shop The Falkland Islands Company Cruise ship in Stanley Harbour West Store supermarket Stanley’s latest tourist attraction 4 ANNUAL REPORT 2006 Chairman’s and Managing Director’s Review of Operations CONTINUED The Portsmouth Harbour Ferry Company “ Maintaining the highest levels of service and ” passenger safety. FALKLAND ISLANDS HOLDINGS PLC 5 were instrumental in developing a new tourist focussed The British Geological Survey has recently completed a business stream. This comprises Mini Bus tours for cruise review of the methodology employed and the exploration line passengers and a former London double decker work carried out to date. FGML is retaining their services Routemaster bus which now runs along the sea front to provide additional interpretative capacity as more data providing visitors with a unique view of Stanley. Further becomes available. growth is expected from these tourist services in future years. Portsmouth Harbour Ferry Company PHFC’s continuing ferry revenues of £3.3 million were in line with expectations. Passenger numbers declined marginally on the previous year as the effects of the introduction of parking charges in Gosport were felt. However revenues were buoyed by increased activity around Portsmouth Harbour linked to the International Fleet Review and Festival of the Sea in June and July 2005. In May 2005 PHFC took delivery of a new ferry vessel, Spirit of Portsmouth at a total cost of £1.9 million underlining the commitment of the Company to modernising its fleet and maintaining the highest levels of service and passenger safety. The cost of the ferry was substantially paid last year. Exploration Activities Falkland Gold and Minerals Limited (FGML) FIH 14.4% shareholding (2005: 14.4%) FGML is now well into the second year of its exploration programme in the Falklands with its operational base at Goose Green. The work programme has been designed to establish the source of alluvial gold discovered in some of the streams in the Islands. As most of the target areas are covered with peat, the initial drilling targets were identified from the aero magnetic survey and this has been followed up by focused ground magnetic surveys. By the end of May 2006, total investigative drilling totalled over 14,000m on ten targets while a further 8,000m is planned on seven further targets. In addition, geochemical peat soil sampling will be carried out on two additional areas of interest. It is now probable that the The market value of the Group’s shareholding of 11,250,000 shares in FGML (14.4%) at 31 March 2006 was £1.8 million (book value: £0.2 million). Falkland Oil and Gas Limited (FOGL) FIH 16.3% shareholding (2005: 18.1%) FOGL has continued to make good progress in acquiring and analysing data over its 79,000 sq km licence area to the South and East of the Falklands, in order to define and prioritise targets for drilling. Over the Austral Summer a further 13,000 km of 2D seismic was acquired bringing the total recorded by FOGL to 22,450 km. The scale of the opportunity for FOGL is such that it became clear to the FOGL board that it was necessary to increase management resources in the UK to cope with the work load. In January 2006, Tim Bushell joined as Chief Executive succeeding John Armstrong who had served as Executive Chairman since the formation of the Company. At the same time John, who will remain on the board, was succeeded as non-executive Chairman by Richard Liddell. Tim is a qualified geologist and has spent the last 10 years developing the exploration and production interests of Paladin Resources in Norway. Prior to this he was responsible for LASMO’s South Atlantic interests which included the exploration campaign in the North Falklands Basin in 1998. Discussions are continuing with possible partners while further analysis and interpretation of data continues. The technical data continues to indicate that a major new petroleum province could lie within the licence area. The current short term objective is to plan and contract for the exploration effort over the next Austral Summer. additional work resulting from increased knowledge of In February 2006 in order to provide the Group with the subsurface terrain will extend the work programme additional financial flexibility FIH sold 1.8 million shares in well into 2007. FOGL generating proceeds of £2.4 million and a profit of 6 ANNUAL REPORT 2006 Chairman’s and Managing Director’s Review of Operations CONTINUED £2.1 million. The market value of the Group’s remaining companies. The PHFC acquisition was the first step shareholding of 15 million shares at 31 March 2006 was towards building a meaningful business outside the £21.5 million (book value: £2.4 million). Falklands and we remain keen to identify UK based People On 10 June 2005 John Foster, was appointed Managing companies for acquisition, subject to them enhancing the underlying value of FIH shares. Director succeeding Bryan McGreal who had been with As we start the new financial year the general backdrop the Group since 1987. John is a Chartered Accountant to trading in the Falklands has improved and this should with wide commercial and financial experience and has help underpin modest growth in the current year. The held directorships in a number of UK listed companies. outlook for PHFC also remains stable although the absence of the maritime festivals this summer will mean On 31 March 2006 Anthony Knightley retired from the that the contribution from the ferry business will fall back Board after many years with the Group first as Company from the record levels seen in 2005/6. Secretary and then latterly as Finance Director. The Board would like to thank Anthony for his contribution to FIH. Prospects for the Falklands over the medium term remain FIH’s Group Financial Controller Mike West was appointed positive as expenditure on oil and mineral exploration Company Secretary on 1 April 2006. activities continues. We remain confident that the Group’s solid level of underlying profitability will be maintained in On 26 July 2005, Mike Killingley was appointed as a the current year. non-executive Director to the Board of FIH. Mike is also Chairman of the PHFC board, is a former Partner with KPMG and is Chairman of Beale Plc and Conder Environmental PLC. Finally we would like to thank the staff and employees of the FIH Group both in the Falklands and in the UK for their contribution and hard work over the past year. As a Group focused on providing essential services to local customers the care and dedication shown by our staff in delivering these services underpins the continued success David Hudd Chairman of your Company. Outlook As we noted last year our strategy is to ensure that the John Foster future of your Company is not wholly dependent upon Managing Director our investments in the listed Falkland exploration 3 July 2006 FALKLAND ISLANDS HOLDINGS PLC 7 Falkland Oil and Gas Limited FOGL licence areas The seismic survey vessel GSI Admiral Falkland Gold and Minerals Limited FGML drill set for sub-peat soil sampling Detailed magnetic image of prospect location Area 6 8 ANNUAL REPORT 2006 Financial Review Summary of its operating businesses and to add new capacity in Turnover for the FIH Group for the year ended 31 March growth areas (eg tourist mini buses in Stanley) and in May 2006 rose by 23% to £15.7 million (2005: £12.8 million) 2005 the Group made a further investment of £2 million and turnover from continuing operations increased by in FOGL to help finance an acceleration of the oil £3 million to £15.2 million. Sales in the Group’s Falkland exploration company’s seismic survey programme. Islands operations (FIC) increased marginally by 3.8% to £11.9 million (2005: £11.5 million) and revenue from the In February 2006 the Group was able to realise Group’s continuing ferry operations at PHFC, which £2.4 million from the sale of a 2% stake in FOGL adding contributed for a full year (2005: 16 weeks) increased by to the proceeds already received earlier in the year from £2.6 million to £3.3 million (2005: £0.7 million). the sale of its Cobham Travel subsidiary. After allocating head office costs and interest payable After paying dividends in November 2005 of £502,000 which are integral to the management of the Group’s (2004/5: £372,000) the Group enjoyed a net cash inflow operating businesses, underlying pre-tax profits before financing of £0.72 million (2005: outflow £7.1 attributable to FIH’s Falklands business, fell slightly in the million). year from £908,000 to £893,000. Underlying pre tax profits attributable to the Group’s ferry operations at During the year, the Group repaid £0.6 million of existing PHFC rose to £667,000 (2005: 31/2 months £64,000). borrowings and drew down a boat mortgage of £1.9 million, repayable over 10 years, to finance the cash cost Exceptional costs of £487,000 (2005: £nil) were incurred of the new ferry vessel Spirit of Portsmouth which came due to a write down in the carrying value of the Upland into service in May 2005. Further loans of £0.7 million Goose hotel, discussed in more detail below and a were drawn down to help fund capital expenditure. The compensation payment made to a director for loss of total of new loans drawn down in the year amounted office. The effective tax rate was 12.1% (2005: 33.8%). Cash Flow to £2.6 million and at 31 March 2006 the Group’s borrowings amounted to £3.3 million. The Group ended the year in a strong financial position with cash balances of £3.6 million and unutilised banking Net cash flow from operating activities rose sharply from facilities of a further £2.3 million. After taking account of the £0.8 million in 2005 to £1.7 million in the year ended £3.3 million of borrowings at 31 March 2006 the Group 31 March 2006 reflecting the increase in the Group’s had net cash balances of £0.3 million (2005: net underlying profitability. borrowings £0.4 million). Net interest paid amounted to £165,000 (2005: £16,000 Balance Sheet receivable) as borrowings increased to finance the Intangible assets of £4.0 million (2005: £4.1 million) £2 million further investment in FOGL shares in May relate principally to goodwill created on the acquisition of 2005. Tax payments rose to £391,000 from £273,000 in PHFC in December 2004 which is being amortised over a the year in line with the increase in profit levels. period of 20 years. During the year the Group invested £505,000 in capital Tangible fixed assets decreased to £8.0 million (2005: expenditure to maintain and enhance the infrastructure £8.5 million) as the carrying value of the Upland Goose FALKLAND ISLANDS HOLDINGS PLC 9 hotel was reduced by £382,000 to reflect its commercial Group drew down medium and long term loans to value. During the year fixed asset additions of £505,000 finance capital expenditure. compared to underlying depreciation of £456,000 (prior to the £382,000 exceptional write down at the Upland Provisions for liabilities and charges relate to deferred tax Goose). Stocks were reduced following the introduction of the more regular freight shipments via EXEL and stock levels at year end fell from £3.3 million to £3.1 million in the prior year. Trade debtors decreased in the year by £225,000 to £1.1 million but an increase in corporation tax and other debtors meant that total debtors remained unchanged at £1.8 million. Creditor balances due within one year fell from £5.4 million in March 2005 to £4.8 million as the level of balances on accelerated capital allowances and other timing differences; these remained largely unchanged at £0.9 million (2005: £0.9 million). Long term liabilities due under the Group’s defined benefit pension schemes in both the UK and the Falkland Islands are shown net of deferred tax. Both these schemes have been closed to new members for many years (see note 20 on page 40). During the year the level of these liabilities increased, reflecting the use of updated assumptions on life expectancy and long term discount rates. extended credit taken from suppliers was reduced. Shareholders funds grew in the year from £10.8 million to Creditor balances due after one year increased from £12.9 million. Net assets per share at cost were £0.8 million at 31 March 2005 to £2.8 million as the 153.3 pence per share (2005: 128.8 pence per share). 10 ANNUAL REPORT 2006 Group Activities Falkland Islands Holdings has two principal operating FIC also provides logistical support and port agent services businesses and substantial shareholdings in two AIM for visiting cruise ships that come to Stanley en route to quoted companies. Operating Businesses the Antarctic or Patagonia. The number of cruise ships visiting the islands has risen sharply in recent years, more than trebling since 1995 to over 85 vessels in 2005/6. FIC also has the capacity to provide maintenance and repair The Falkland Islands Company (FIC) services and provides agency services for the support FIH 100% shareholding vessels and combat ships of the Royal Navy. Recently the The Group’s operations in the Falkland Islands date back Agency has been acting as the agent for the GSI Admiral over 150 years to 1852 when the Company was granted which has been carrying out seismic surveys in the area its Royal Charter. From its early days as a major landowner for the last six months for FOGL 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 growing number of cruise ship also owns 22 residential properties which are rented out passengers that visit the Islands each year. Other outlets on a long-term basis to business users such as Ministry of sell clothing, office supplies, DIY, home improvement and Defence contractors, and fishing companies. FIC is building supplies. In total FIC has nearly 30,000 sq ft of steadily developing these sites as the economy of the retail space in the Stanley area and a retail outlet located Islands continues to grow and is well placed in the event at the 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 The cold waters around the Falkland Islands are a prolific Islands and now acts as the sole agent for the Caribbean source of fish and squid and attract fishing fleets from all Alliance Insurance Company which is a former subsidiary over the world, particularly from Japan, Korea and of Royal and Sun Alliance who withdrew from the Islands Taiwan. FIC provides a broad range of logistical services to in 2003. Since then more active management by CAIC these offshore fishing fleets that can be away from their has led to significant growth in the insurance business. home 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 provides shipping services to the Falkland Islands and squid and fishing shoals. Income from the sale of squid working with the UK Ministry of Defence and its licences is a key driver of the Falklands economy. contractor EXEL, Darwin supplies the Islands with a FALKLAND ISLANDS HOLDINGS PLC 11 Falkland Islands Holdings plc The Falkland Islands Company Limited Percentage of shares held 100% Falkland Oil and Gas Limited Percentage of shares held 16.3% The Portsmouth Harbour Ferry Company Limited Percentage of shares held 100% Falkland Gold and Minerals Limited Percentage of shares held 14.4% regular shipment 10 times a year. Darwin’s service is used PHFC provides a vital service to the residents of Gosport both by FIC’s own operations and by independent many of whom work or travel to the shops or restaurants businesses and private individuals. in the larger City of Portsmouth across the water. The Portsmouth Harbour Ferry Company Limited (PHFC) FIH 100% shareholding Approximately half a mile across the harbour by sea, the ferry journey takes a little over 5 minutes whereas the journey by road to Portsmouth skirting around the head of the harbour is approximately 14 miles long and in today’s The Portsmouth Harbour Ferry Company (PHFC) has a congested traffic the journey can take up to an hour. history almost as long as that of The Falkland Islands Company. Incorporated in 1884 the business has Ferry services run for 181/2 hours a day from 5.30am until provided a passenger ferry service across the mouth of midnight, crossing the harbour every 71/2 minutes in peak Portsmouth Harbour from Gosport to Portsmouth for well periods. The ferry service operates 363 days a year and in over 100 years. calendar 2005 carried almost 4 million passengers. 12 ANNUAL REPORT 2006 Group Activities CONTINUED The ferry is renowned for its reliability and the friendly FIH holds 11,250,000 FGML shares. At the balance sheet and efficient service of its crew many of whom come from date this 14.4% holding had a book value of £0.2 million families who have worked as watermen in the harbour for and a market value based on the FGML share price at generations. The ships are serviced and maintained by the 31 March 2006 of £1.8 million. Company’s own team of specialist marine engineers and shipwrights who are based at a one acre site at Clarence Falkland Oil and Gas Limited (FOGL) Marina half a mile from the Company’s Gosport base. FIH 16.3% shareholding Falkland Oil and Gas Limited (FOGL) was incorporated in PHFC currently operates four vessels on its ferry service 2004 and is quoted on AIM. The Company has licences with two on duty on any given day. The oldest two vessels over 79,000 sq km in the South and East Falklands basin were commissioned in 1966 and are still in relatively good and is currently progressing its seismic programme condition but in 2005 the Company took delivery of a designed to identify and prioritise targets for drilling. new ferry, Spirit of Portsmouth, which is capable of carrying 300 passengers and of doubling as a pleasure At 31 March 2006 the Group held 15,000,000 FOGL cruiser in summer and for special events, weddings, shares with a market value of £21.5 million. parties and corporate entertaining. In addition to FOGL there are a number of other Falkland Gold and Minerals Limited (FGML) companies exploring for oil and gas around the Falkland FIH 14.4% shareholding Islands including three other AIM listed companies: Desire Falkland Gold and Minerals Limited (FGML) was Petroleum, Borders and Southern Petroleum and incorporated in February 2004 and has an exclusive Rockhopper Exploration. Any oil or gas production would licence for mineral exploration on all of the onshore land have a dramatic impact on the economy of the Falkland mass of the Falkland Islands and is quoted on AIM. Islands and FIC would be a major beneficiary of this. Board of Directors and Secretary FALKLAND ISLANDS HOLDINGS PLC 13 David Hudd (61) Chairman 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 Betcorp Limited, and non-executive Deputy Chairman of both Falklands Oil and Gas Limited and Falkland Gold and Minerals Limited. John Foster (48) 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. Leonard Licht (61) Non-executive Director 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, Remuneration and Audit Committees and is the senior independent non-executive Director. Sir Harry Solomon (69) Non-executive Director 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. Mike Killingley (55) Non-executive Director Mike was appointed to the Board on 26 July 2005, having previously been appointed non-executive Chairman of the Portsmouth Harbour Ferry Company Limited, following the Company’s successful bid. He is a Chartered Accountant and was a partner of KPMG (and predecessor firms) from 1984 to 1998. He is currently non-executive Chairman of Beale plc, a listed Company, and non-executive Chairman of Conder Environmental plc, an AIM listed Company, as well as a non-executive director of several private companies. Until 2005 he was non-executive Chairman of Southern Vectis plc which was an AIM listed Company. He is Chairman of the Audit Committee and a member of the Remuneration Committee. Mike West (45) Company Secretary Mike is a fellow of the Association of Chartered Certified Accountants and associate of the Institute of Chartered Secretaries and Administrators and was appointed Company Secretary on 1 April 2006. Bryan McGreal and Anthony Knightley served as directors during the year. Bryan McGreal retired on 25 July 2005 and Anthony Knightley retired on 31 March 2006. 14 ANNUAL REPORT 2006 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 2006. 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 pages 24 and 34. The Group profit for the year after taxation amounted to £2,714,000 (2005: £601,000). Basic earnings per share were 32.6p (2005: 8.2p). The Directors recommend the payment of a dividend of 6.5p (2005: 6.0p) per share which, if approved by the shareholders at the forthcoming Annual General Meeting, will be paid on 3 November 2006 to shareholders on the register at the close of business on 6 October 2006. This has not been included within creditors as it was not approved before the year end. Dividends paid during the year comprise a dividend of 6.0p per share in respect of the previous year ended 31 March 2005. Principal activities and business review The business of the Group during the year ended 31 March 2006 was general trading in the Falkland Islands and the operation of a passenger ferry service across Portsmouth Harbour. The principal activities of the Group were ferry operations in the UK, retail and wholesale distribution, servicing the fishing industry, port operation, shipping, automotive, financial services, hotel and commercial accommodation in the Falkland Islands, 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 and Managing Director’s Review of Operations and in the Financial Review and Group Activities on pages 2 to 12 and should be considered as part of the Directors’ Report for the purposes of the requirements of the enhanced Directors’ Report guidance. 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 19 and 20. Details of how the Board and the principal Board Committees operate are set out below and under the heading ‘Board Committees’ on page 14 and also under the heading ‘Corporate Governance’ on pages 16 to 18. The Board currently comprises a part-time executive Chairman, one executive Director and three non-executive Directors, whose biographies are on page 13. 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 Leonard Licht and Mike Killingley 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 20 and 21. 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 Mike Killingley, Leonard Licht and Sir Harry Solomon and is chaired by Mike Killingley. 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. FALKLAND ISLANDS HOLDINGS PLC 15 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 18. 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 20 on pages 40 to 44. Share capital and substantial interests in shares During the year 1,758 share options were exercised. There have been no changes to the authorised share capital which remains at 10,000,000 ordinary shares. Further information about the Company’s share capital is given in note 21 on page 45. Details of the Company’s executive share option scheme and employee ownership plan can be found on pages 20 and 21 and in notes 21 and 22 on page 45. The Company has been notified of the following substantial interests in the issued ordinary shares of the Company as at 1 June 2006. Substantial shareholdings Artemis Investment Management Jupiter Asset Management INVESCO English & International Trust plc L S Licht Sir Harry Solomon Number of shares Percentage of issued shares 1,128,402 543,988 365,557 791,250 430,027 13.46 6.49 4.36 9.44 5.13 Payments to suppliers 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 2006 or 31 March 2005. Charitable and political donations Charitable donations made by the Group during the year amounted to £9,745 (2005: £3,241). There were no political donations. 16 ANNUAL REPORT 2006 Directors’ Report CONTINUED Disclosure of information to auditors The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Auditors A resolution proposing the re-appointment of KPMG Audit Plc will be put to shareholders at the Annual General Meeting. Annual General Meeting The Company’s Annual General Meeting will be held at the London offices of the Company’s solicitors, Addleshaw Goddard, 150 Aldersgate, London EC1A 4EJ on 13 September 2006 at 11.15am. 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). • 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, one executive Director, and three 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 13, 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. FALKLAND ISLANDS HOLDINGS PLC 17 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. 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 13 to 18. 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 20 and 21. 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 22 and ‘Respective Responsibilities of Directors’ and Auditors’ on page 23. The Directors are of the opinion that they have established procedures necessary to comply with the spirit and intentions of the provisions of the Combined Code as set out in the Listing Rules of the Financial Services Authority for the year to 31 March 2006. 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 2006 (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. 18 ANNUAL REPORT 2006 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. UK directors visit the Falkland Islands on a quarterly basis. This position is reviewed on a regular basis to determine whether a formal internal audit department would be more cost effective. International financial reporting standards The Company and its subsidiaries will adopt International Financial Reporting Standards (IFRS) when preparing the interim and final financial statements for the year ending 31 March 2008. The comparative figures for the year ending 31 March 2007 will be restated and there will be changes to the Company’s and subsidiaries’ accounting policies. For prudence it is likely that the Company and its subsidiaries will file interim financial statements 30 days later than normal, which is the maximum period allowable. The transition date was 1 April 2006 and the Company and its subsidiaries are planning the process of converting the opening balance sheet as at 1 April 2006. Going concern The Directors consider that, after making appropriate enquiries and at the time of approving this Annual Report and Financial Statements, 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 Financial Statements. Remuneration The following disclosure is the Directors’ Remuneration report given to comply with best practice. Remuneration Committee The Remuneration Committee (‘Committee’) comprises Sir Harry Solomon, Mike Killingley 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. FALKLAND ISLANDS HOLDINGS PLC 19 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 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 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. Share Options Details of the Company’s Executive Share Option Scheme and Employee Share Option Plan can be found on pages 20 and 21 under the heading ‘Directors’ Interests in Shares’, and note 22. 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. Equity-Settled Incentives Going forward, all executive share options will be satisfied as equity-settled incentives (sometimes known as ‘stock-appreciation rights’). This will mean that on exercise the optionholder will not have to pay the exercise price of the option but will only receive that number of shares with a value equal to the gain made (which may be on either a pre or post-tax basis), thus reducing the dilutive effect of the exercise. Pensions and Life Assurance During the year John Foster, Bryan McGreal and Anthony Knightley accrued benefits under a defined contribution pension scheme. The Scheme also covers four 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 included 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 2006 are shown in the table below under ‘Taxable Benefits’. Termination, notice periods and retirement by rotation David Hudd has a service contract and he or the Company may terminate the contract by giving six months’ notice. John Foster has a service contract which the Company may terminate by giving twelve months’ notice. Mr Foster is required to give the Company six months’ notice. 20 ANNUAL REPORT 2006 Directors’ Report CONTINUED Leonard Licht is the Director retiring by rotation at the forthcoming Annual General Meeting and, being eligible, offers himself for re-election in accordance with the Company’s Articles of Association. Mike Killingley, having been appointed during the year, offers himself for election in accordance with the Company’s Articles of Association. 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 2006 and in the preceding year is as follows: 2005 Total £’000 125 33 127 104 – 20 20 429 Expiry date 9 April 2010 26 July 2011 14 Aug 2012 9 Feb 2015 21 Mar 2015 David Hudd John Foster Bryan McGreal Anthony Knightley Mike Killingley Leonard Licht Sir Harry Solomon Salary £’000 90 130 28 68 25 20 20 Bonuses £’000 Benefits £’000 Pensions £’000 Compensation for loss of office £’000 60 47 – – – – – – – 4 10 – – – 14 – 21 12 16 – – – 49 – – – 101 – – – 101 2006 Total £’000 150 198 44 195 25 20 20 652 381 107 Directors’ interests in shares As at 31 March 2006, 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 £1.50 £1.395 £1.845 £5.20 £5.20 10 April 2003 27 July 2004 15 Aug 2005 10 Feb 2008 22 Mar 2008 – – – – – – – Opening 1 April 2005 Total 1 April 2005 Exercised in period Granted in period Lapsed in period Closing 31 March 2006 Total 31 March 2006 10 April 2000 27 July 2001 15 Aug 2002 10 Feb 2005 22 Mar 2005 14 June 2005 B B A A B A A B A – – 81,300 – – 25,000 6,500 – – – – – – 33,775 23,917 81,300 31,500 57,692 – – – – – 49,411 – – 31,500 23,917 130,711 – 47,892 130,711 31,500 71,809 – – – Scheme A = executive share option scheme. Scheme B = employee share ownership plan. 14,117 15,000 £4.25 14 June 2008 13 June 2015 – (15,000) FALKLAND ISLANDS HOLDINGS PLC 21 The mid-market price of the Company’s shares at 31 March 2006 was 357.5 pence and the range during the year was 300 pence to 592.5 pence. The Directors’ options extant at 31 March 2006 totalled 234,020 and represented 2.8% of the Company’s issued share capital. 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 exercise price of the grant is 175 pence per share and the options are exercisable on or after 1 April 2006. David Hudd Bryan McGreal Anthony Knightley Ordinary shares Ordinary shares at 31 March 2006 at 31 March 2005 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 John Foster Mike Killingley Leonard Licht Sir Harry Solomon Ordinary shares Ordinary shares at 31 March 2006 at 31 March 2005 40,000 5,000 3,000 791,250 430,027 38,400 2,000 – 791,250 425,027 The only change to occur in the period from 31 March 2006 to 30 June 2006 was that Mr Hudd exercised his SAYE options on 5,400 shares, there were no other changes in the above interests. All the above interests were beneficial at the above dates. At the date of this Report, John Foster was deemed to be interested as Discretionary Beneficiary 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. 22 ANNUAL REPORT 2006 Directors’ Report CONTINUED Statement of directors’ responsibilities in respect of the directors’ report and the financial statements The directors are responsible for preparing the directors’ report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Group and the parent Company financial statements in accordance with UK Accounting Standards. The group and parent Company financial statements are required by law to give a true and fair view of the state of affairs of the Group and the parent Company and of the profit or loss for that period. In preparing these financial statements, the directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgments and estimates that are reasonable and prudent; • State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent Company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The directors’ are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By Order of the Board M D West Secretary 3 July 2006 Charringtons House The Causeway Bishop’s Stortford Hertfordshire CM23 2ER FALKLAND ISLANDS HOLDINGS PLC 23 Independent Auditor’s Report to the members of Falkland Islands Holdings plc We have audited the group and parent Company financial statements (the ‘financial statements’) of Falkland Islands Holdings plc for the year ended 31 March 2006 which comprise the consolidated profit and loss account, the consolidated and Company balance sheets, the consolidated cash flow statement, the consolidated statement of total recognised gains and losses and the related notes. These financial statements have been prepared under the accounting policies set out therein. 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’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the statement of directors’ responsibilities on page 22. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion, the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Chairman’s and Managing Director’s Review of Operations, the Financial Review and Group Activities that is cross referenced from the Business Review section of the Directors’ Report. We also report to you if, in our opinion 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 other transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatement or material inconsistencies within the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’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. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Group’s and the parent Company’s affairs as at 31 March 2006 and of the Group’s profit for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors’ Report is consistent with the financial statements. KPMG Audit Plc Chartered Accountants Registered Auditor 3 July 2006 Nottingham 24 ANNUAL REPORT 2006 Group Profit and Loss Account FOR THE YEAR ENDED 31 MARCH 2006 Notes Turnover Continuing operations Discontinued operations 2, 3 Turnover 3 3 4 3 Cost of sales Gross profit Administrative expenses Amortisation of goodwill Administrative expenses – exceptional costs Total administrative expenses 3, 5 Other operating income Operating profit before exceptional items and amortisation of goodwill Amortisation of goodwill Exceptional costs Group operating profit Continuing operations Discontinued operations 3, 5 Group operating profit Profit on sale of discontinued operation Profit on sale of fixed asset investment Net interest expense 13 6 Profit on ordinary activities before taxation 7 Taxation Profit on ordinary activities after taxation for the financial year 9 Earnings per share Basic Diluted Proposed dividend per ordinary share 2006 £’000 As restated 2005 £’000 15,209 527 15,736 (9,855) 5,881 12,206 548 12,754 (8,708) 4,046 (4,401) (3,280) (204) (487) (65) – (5,092) (3,345) 344 1,824 (204) (487) 1,133 1,132 1 1,133 84 2,135 (264) 3,088 (374) 2,714 32.6p 32.2p 6.5p 291 1,057 (65) – 992 995 (3) 992 – – (85) 907 (306) 601 As restated 8.2p 8.1p 6.0p Group Balance Sheet AT 31 MARCH 2006 FALKLAND ISLANDS HOLDINGS PLC 25 Notes £’000 £’000 £’000 £’000 2006 As restated 2005 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors due within one year Debtors due after one year 11 12 13 14 15 15 18 Cash at bank and in hand 3,979 8,042 2,610 3,107 1,789 48 1,837 3,601 8,545 4,136 8,501 900 14,631 13,537 3,308 1,788 24 1,812 914 6,034 16 Creditors: amounts falling due within one year (4,797) (5,419) Net current assets Total assets less current liabilities 17 Creditors: amounts falling due after more than one year 19 Provisions for liabilities and charges Net assets excluding pension liabilities 20 Net pension scheme liabilities Net assets Capital and reserves Called up share capital Share premium account Other reserves Revenue reserves Equity shareholders’ funds 21 22 22 22 23 3,748 18,379 (2,765) (853) 14,761 (1,909) 12,852 838 7,064 703 4,247 12,852 615 14,152 (831) (882) 12,439 (1,648) 10,791 838 7,061 703 2,189 10,791 The financial statements were approved by the Board of Directors on 3 July 2006 and were signed on its behalf by: J L Foster Managing Director 26 ANNUAL REPORT 2006 Company Balance Sheet AT 31 MARCH 2006 Notes £’000 £’000 £’000 £’000 2006 As restated 2005 Fixed assets 13 Investments Current assets Debtors Cash at bank and in hand 15 18 16 Creditors: amounts falling due within one year 17,654 15,997 333 1,055 1,388 (781) 644 – 644 (961) Net current assets / (liabilities) Total assets less current liabilities 17 Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Other reserves Revenue reserves Equity shareholders’ funds 21 22 22 22 23 607 18,261 (1,132) 17,129 838 7,064 5,389 3,838 17,129 (317) 15,680 (785) 14,895 838 7,061 5,389 1,607 14,895 The financial statements were approved by the Board of Directors on 3 July 2006 and were signed on its behalf by: J L Foster Managing Director FALKLAND ISLANDS HOLDINGS PLC 27 Group Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2006 Reconciliation of operating profit to net cash inflow from operating activities As restated Operating profit Profit on sale of fixed assets Amortisation of goodwill Depreciation and impairment charges (Increase) / decrease in stocks Increase in debtors Decrease 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 Receipts from sale of investment Acquisitions Sale of subsidiary undertaking Investment in subsidiary undertaking Dividends paid Cash inflow / (outflow) before financing Financing Repayment of secured loan Repayment of loan notes Issue of ordinary share capital New secured loan Sale of own shares Share options exercised Cash flow from financing Increase / (decrease) in cash in the year 2006 £’000 1,133 (12) 204 838 201 (12) (687) 1,665 2006 2005 £’000 £’000 £’000 2005 £’000 992 – 65 292 (229) (256) (87) 777 £’000 777 16 1,665 (165) 47 (31) (169) (104) (391) (273) (1,721) (5,556) (372) (7,129) (63) 178 (502) 722 (1,243) (622) 144 – – (5,556) (279) – 5,472 1,000 112 98 2,045 2,767 6,403 (726) 38 (203) (250) (141) (505) (2,000) 15 2,427 178 – (524) (43) 3 2,609 – – 28 ANNUAL REPORT 2006 Group Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2006 – CONTINUED Reconciliation of cash flow to movement in net funds / (debt) Increase / (decrease) in cash in the year Cash inflow from increase in debt Change in net debt resulting from cash flows Change in net debt resulting from acquisitions Net (debt ) / funds at start of year Net funds / (debt) at end of year Analysis of changes in net funds / (debt) Cash at bank and in hand Overdraft Debt due within one year Debt due after one year Net funds / (debt) at end of year 2006 £’000 2,767 (2,042) 725 – (432) 293 Cash flows £’000 2,687 80 2,767 (107) (1,935) 725 2005 £’000 (726) (848) (1,574) 209 933 (432) As at 31 March 2006 £’000 3,601 – 3,601 (542) (2,766) 293 As at 31 March 2005 £’000 914 (80) 834 (435) (831) (432) Consolidated Statement of Total Recognised Gains and Losses FOR THE YEAR ENDED 31 MARCH 2006 Profit for the year PHFC scheme loss FIC scheme gain Actuarial loss on pension schemes (see note 20) Movement on deferred tax asset relating to pension scheme Total recognised gains and losses relating to the financial year Prior year adjustment – FRS 17 (note 20) Total gains and losses recognised since last annual report 2006 £’000 £’000 £’000 As restated 2005 – (51) (88) 57 2,714 (31) (123) 2,560 (635) 1,925 £’000 601 (51) 17 567 FALKLAND ISLANDS HOLDINGS PLC 29 Notes to the Financial Statements FOR THE YEAR ENDED 31 MARCH 2006 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, except as noted below. In these financial statements the following new standards have been adopted for the first time: • • • • FRS 21 ‘Events after the balance sheet date’; FRS 17 ‘Retirement benefits’; The presentation requirements of FRS 25 ‘Financial instruments: presentation and disclosure’; and FRS 28 ‘Corresponding amounts’. The recognition and measurement requirements of FRS 17 ‘Retirement benefits’ have also been adopted; previously only the transitional disclosures of that standard have been followed. The effect of fully adopting FRS17 is set out in note 20. The accounting policies under these new standards are set out below together with an indication of the effects of their adoption. FRS 28 ‘Corresponding amounts’ has had no material effect as it imposes the same requirements for comparatives as hitherto required by the Companies Act 1985. The effect of adopting FRS21 is set out in note 8. The corresponding amounts in these financial statements are restated in accordance with the new policies. 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 2006 and comparatives for the year ended 31 March 2005. In accordance with s230(4) of the Companies Act 1985, a separate profit and loss account dealing with the results of the Company only has not been presented. 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. 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 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 2 – 5% 2% 10 – 25% 3.3% 30 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED Deferred taxation 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’. 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 The Group operates two defined contribution pension schemes. The assets of the schemes are held separately from those of the Group in an independently administered fund. The amount charged to the profit and loss account represents the contributions payable to the schemes in respect of the accounting period. The Group also operates two pension schemes providing benefits based on final pensionable pay. The assets of these schemes are held separately from those of the Group. Pension scheme assets are measured using market values. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The pension scheme surplus (to the extent that it is recoverable) or deficit is recognised in full. The movement in the scheme surplus / deficit is split between operating charges, finance items and, in the statement of total recognised gains and losses, actuarial gains and losses. 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. Classification of financial instruments issued by the Group Following the adoption of FRS 25, financial instruments issued by the Group are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that they meet the following two conditions: a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. FALKLAND ISLANDS HOLDINGS PLC 31 1 Accounting policies CONTINUED To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. Finance payments associated with financial liabilities are dealt with as part of interest payable and similar charges. Finance payments associated with financial instruments that are classified as part of shareholders’ funds (see dividends policy), are dealt with as appropriations in the reconciliation of movements in shareholders’ funds. Dividends on shares presented within shareholders’ funds Dividends unpaid at the balance sheet date are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements. 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 2006 £’000 As restated 2005 £’000 2006 £’000 As restated 2005 £’000 Total As restated 2005 £’000 2006 £’000 Turnover – continuing operations 11,902 11,468 3,307 738 15,209 12,206 Discontinued operations – Cobham Travel – – 11,902 11,468 527 3,834 548 527 548 1,286 15,736 12,754 Segment operating profit 670 987 463 5 1,133 992 Segment operating profit before amortisation of goodwill and exceptional items Interest payable Underlying profit before tax before amortisation of goodwill and exceptional items Goodwill amortisation Exceptional costs Profit on sale of fixed asset investments Profit on sale of discontinued operations 1,105 (212) 893 – (435) 2,135 – 987 (79) 908 – – – – Group profit before taxation 2,593 908 719 (52) 667 (204) (52) – 84 495 70 (6) 64 (65) – – – 1,824 (264) 1,057 (85) 1,560 (204) (487) 2,135 84 972 (65) – – – (1) 3,088 907 Net assets 8,941 7,650 3,911 3,141 12,852 10,791 32 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 3 Analysis of continuing and discontinued operations 2006 As restated 2005 Continuing Discontinued £’000 £’000 Total £’000 Continuing Discontinued £’000 £’000 Turnover Cost of sales Gross profit Administrative expenses Other operating income Operating profit / (loss) 15,209 (9,384) 5,825 (5,034) 341 1,132 527 (471) 56 15,736 (9,855) 12,206 (8,212) 5,881 3,994 (58) (5,092) (3,286) 3 1 344 1,133 287 995 4 Exceptional costs Compensation for loss of office Impairment of fixed assets (note 12) 548 (496) 52 (59) 4 (3) 2006 £’000 105 382 487 Total £’000 12,754 (8,708) 4,046 (3,345) 291 992 2005 £’000 – – – Compensation costs of £105,000 for Director’s loss of office and associated legal fees. Following a disappointing period of trading, a decision was taken to write down the carrying value of the Upland Goose hotel (see note 12). 5 Operating profit Operating profit on ordinary activities is stated after charging: Depreciation and other amounts written off tangible fixed assets Goodwill amortisation Auditors’ remuneration – for audit services (Company £18,000 (2005: £15,000)) – for non audit services Operating lease rental – vehicles – other leases 2006 £’000 838 204 54 22 3 31 2005 £’000 292 65 32 13 21 59 Of the non-audit related fees paid to the auditor, £22,000 (2004: £7,000) relates to general advisory and tax work. Other operating income of £344,000 (2005: £291,000) is comprised mainly of rents and financial services income. 6 Net interest expense Interest receivable Expected return on pension scheme assets Interest payable on bank loans Interest cost on pension scheme liabilities 2006 £’000 38 9 47 (194) (117) (264) As restated 2005 £’000 47 – 47 (41) (91) (85) 7 Taxation The tax charge based on profit for the period comprises: UK corporation tax at 30% Less double taxation relief Overseas taxation at 25% Adjustments in respect of prior periods Total current tax Deferred taxation Deferred taxation on pension liability movement FALKLAND ISLANDS HOLDINGS PLC 33 2006 £’000 228 (114) 114 203 58 375 8 (9) 374 As restated 2005 £’000 226 (149) 77 231 (31) 277 32 (3) 306 There is no tax payable on the disposal of the discontinued operation. Factors affecting the tax charge for the current period: The current tax charge for the period is lower (2005: higher) than the standard rate of corporation tax in the UK of 30% (2005: Falkland Islands rate of 25%). The difference can be explained below: Current tax reconciliation: Profit on ordinary activities before tax Current tax at 30% (2005: 25%) Expenses not deductible for tax purposes Capital allowances in excess of depreciation Marginal rate on overseas tax earnings Non-taxable income Other timing differences Excess foreign tax Marginal relief Lower tax charge overseas Adjustments to tax charge in respect of previous periods Total current tax 8 Dividend The aggregate amount of dividends comprises: Final dividends paid in respect of prior year but not recognised as liabilities in that year Aggregate amount of dividends paid in the financial year 2006 £’000 3,088 926 41 (33) – (579) (20) 2 (3) (17) 58 375 2006 £’000 502 502 As restated 2005 £’000 907 227 13 36 32 – – – – – (31) 277 As restated 2005 £’000 369 369 34 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 8 Dividend CONTINUED During the period the Company adopted FRS 21 ‘Events after the balance sheet date’ which superseded SSAP 17. Under the new standard, dividends payable are recognised only in the period in which they are approved in the annual general meeting, whereas under SSAP 17 dividends were accrued for when proposed. This has resulted in an increase of £502,000 in the consolidated retained profit as at 31 March 2005 (Company: Decrease of £363,000). The Directors have proposed a dividend of 6.5p per share. This has not been included within creditors as it was not approved before the year end. 9 Earnings per share Profits are calculated as follows: Profit on ordinary activities after taxation for the financial year The profits above form the basis of calculating the basic and diluted earnings per share. Basic earnings per share Diluted earnings per share 2006 £’000 2,714 2006 32.6p 32.2p Earnings per share on underlying profits before amortisation of goodwill, exceptional items and disposals. Underlying profit before tax (note 2) Less: tax thereon Underlying profit after tax 2006 £’000 1,560 (504) 1,056 As restated 2005 £’000 601 2005 8.2p 8.1p 2005 £’000 972 (306) 666 Earnings per share on underlying profit before amortisation of goodwill, exceptional costs and disposals Diluted earnings per share on underlying profit before amortisation of goodwill, exceptional costs and disposals Allotted called up and fully paid – Ordinary shares of 10p each Less: shares held under ESOP (note 21) Average number of shares in issue excluding ESOP Maximum dilution re share options Diluted weighted average number of ordinary shares in issue 2006 2005 12.7p 12.5p 9.1 9.0p 2006 Number 2005 Number 8,380,066 7,391,715 (55,417) (55,417) 8,324,649 7,336,298 109,736 91,350 8,434,385 7,427,648 FALKLAND ISLANDS HOLDINGS PLC 35 9 Earnings per share CONTINUED The additional calculation of earnings per share is given in order to provide a more meaningful comparison of underlying performance. The calculation of basic, pre amortisation and underlying earnings per share is based on the weighted average number of ordinary shares in issue during the year, excluding shares held by the Employee Share Ownership Plan, of 8,324,649 (2005: 7,336,298). The calculation of fully diluted earnings per share is based on the ordinary shares in issue plus the dilutive effect of outstanding shares options, resulting in a weighted average number of shares of 8,434,385 (2005: 7,427,648). 10 Employment costs including Directors Wages and salaries Social security costs Other pension costs 2006 £’000 3,228 210 156 3,594 2005 £’000 2,423 128 86 2,637 Details of Directors’ remuneration are included within the Directors’ report, under the heading ‘Remuneration’ and ‘Details of Directors’ Remuneration and Emoluments’ on pages 20 and 21. Average number of persons employed: United Kingdom Falkland Islands 11 Intangible assets Cost: At 1 April 2005 Fair value adjustments relating to prior year acquisitions (note 26) At 31 March 2006 Accumulated amortisation: At 1 April 2005 Charge for the year At 31 March 2006 Net book value: Balance at 31 March 2006 Balance at 31 March 2005 2006 Number 2005 Number 50 92 142 53 85 138 Goodwill £’000 4,201 47 4,248 65 204 269 3,979 4,136 36 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 12 Tangible fixed assets of the Group Cost: At 1 April 2005 Additions Disposals At 31 March 2006 Accumulated depreciation: At 1 April 2005 Charge for the year Impairment Disposals Fair value adjustment (note 26) At 31 March 2006 Net book value: At 31 March 2006 At 31 March 2005 Freehold land and buildings £’000 Long leasehold land and buildings £’000 4,744 137 – 4,881 705 140 382 – 123 1,350 3,531 4,039 342 – – 342 43 7 – – – 50 292 299 Vehicles, plant and equipment £’000 Total £’000 2,593 10,859 259 (24) 505 (24) 2,828 11,340 1,594 195 – (21) – 2,358 456 382 (21) 123 Ships £’000 3,180 109 – 3,289 16 114 – – – 130 1,768 3,298 3,159 3,164 1,060 999 8,042 8,501 Following a disappointing period of trading, a decision was taken to write down the carrying value of the Upland Goose hotel. This assessment was based on discounted cash flow projections using an appropriately risk adjusted discount rate (11%). The exceptional depreciation charge resulting from this write down amounted to £382,000 and is shown as an exceptional item. Included in freehold land and buildings is land stated at £948,000 (2005: £948,000) which is not depreciated. The Company has no tangible fixed assets. 13 Fixed asset investments Cost: As at 1 April 2005 Additions in the year Disposals in the year As at 31 March 2006 Group and Company FGML FOGL investment investment £’000 £’000 190 – – 190 710 2,000 (290) 2,420 Total £’000 900 2,000 (290) 2,610 The investments are shown at cost at the balance sheet date. In June 2005 the Company acquired a further 2,352,941 2p Ordinary Shares in Falkland Oil and Gas Limited for £2 million, this took the Company investment to 16,802,941 shares at cost of £2.7 million representing 18.3% of the issued share capital of FOGL. On 21 February 2006 the Company realised part of its investment by selling 1,802,941 shares (10.7%) of its holding with a cost of £290,000 for £2,425,000 resulting in a profit on disposal of £2,135,000. 13 Fixed asset investments CONTINUED Market value and shareholdings: FOGL FGML Market value at 31 March Percentage of authorised equity share capital: FOGL FGML FALKLAND ISLANDS HOLDINGS PLC 37 Group and Company 2006 £’000 21,500 1,800 23,300 2005 £’000 17,100 4,300 21,400 16.3% 14.4% 18.1% 14.4% At the year end the Group held 11,250,000 shares in FGML representing a 14.4% interest and held 15,000,000 shares in FOGL representing a 16.3% interest. As at 1 April 2005 Adjustment to investment value (note 26) As at 31 March 2006 Company Investment in Group undertakings £’000 15,097 (53) 15,044 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% Trading Company Limited Darwin Shipping Limited Ordinary shares of £1 100% indirect Arranging the purchase and shipment of goods to the Falkland Islands Shipping services between the United Kingdom and the Falkland Islands The Portsmouth Harbour Ordinary shares of £1 100% Ferry services and travel agency Ferry Company Limited Portsea Harbour Company Limited Clarence Marine Engineering Limited Ordinary shares of £1 Ordinary shares of £1 Gosport Ferry Limited Ordinary shares of £1 100% indirect 100% indirect 100% indirect in the United Kingdom Statutory harbour authority Marine and engineering maintenance Passenger ferry operators All of the above are incorporated in England and Wales except for Darwin Shipping Limited, which is incorporated in the Falkland Islands. 38 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 14 Stocks Goods for resale 15 Debtors 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 Group 2006 £’000 2005 £’000 3,107 3,308 Group Company 2006 £’000 2005 £’000 1,085 1,310 – 96 46 376 186 1,789 48 1,837 – 86 33 38 321 1,788 24 1,812 2006 £’000 – 93 – 219 21 – 333 – 333 2005 £’000 – 450 – 168 26 -– 644 – 644 The cost of assets acquired for the purpose of letting under hire purchase agreements by the Group during the period amounted to £103,000 (2005: £125,000). The aggregate rentals receivable during the period in respect of hire purchase agreements were £193,000 (2005: £190,000). 16 Creditors: amounts falling due within one year Bank loans and overdrafts (note 18) Trade creditors Other creditors including taxation and social security Corporation tax Accruals and deferred income Unsecured loan notes (note 18) Group Company 2006 £’000 499 2,640 244 424 947 43 4,797 2005 £’000 472 2,506 598 427 1,373 43 5,419 2006 £’000 300 – 153 – 285 43 781 2005 £’000 480 – 178 – 260 43 961 Within other creditors is tax and social security of £46,188 (2005: £46,216). There are cross guarantees and fixed and floating charges over the assets of the Company and its subsidiaries in respect of bank loans and overdrafts, shown in notes 16 to 18. FALKLAND ISLANDS HOLDINGS PLC 39 17 Creditors: amounts falling due after more than one year Bank loans Unsecured loan notes Group Company 2006 £’000 2,723 42 2,765 2005 £’000 746 85 831 2006 £’000 1,090 42 1,132 2005 £’000 700 85 785 The bank loans are secured, see note 16. 18 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 Over five years Cash / (overdraft) Net funds / (debt) Group Company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 (542) (542) (1,590) (634) (3,308) 3,601 293 (515) (389) (442) – (1,346) 914 (432) (342) (342) (790) – (1,474) 1,055 (419) (343) (343) (442) – (1,128) (180) (1,308) 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 an unutilised overdraft facility of £2.3 million. Cash Cash comprises: Short term money markets Cash held in sterling accounts Cash held in foreign currency accounts Group 2006 £’000 3,470 70 61 3,601 2005 £’000 250 610 54 914 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. The Group drew down a loan of £1.9 million in respect of the new ferry. The loan is repayable over a period of ten years from June 2005 and bears interest at a rate of 5.6%. The loan has been hedged with an interest rate cap of 6.5% and a floor of 4.25%. At 31 March 2006 the fair values of both of these instruments was a liability of £8,000. 40 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 18 Borrowings, derivatives and other financial instruments CONTINUED Interest on the unsecured loan notes accrued at 5% and interest is payable half yearly in April and October. 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 2006 the Group had contracts outstanding to purchase foreign currency amounting to £nil (2005: £nil). Fair value of financial instruments Other than disclosed above there is no material difference between the book values and the fair values of financial instruments. 19 Provisions for liabilities and charges Group Deferred taxation: At 1 April 2005 Transfer to profit and loss account Fair value adjustment (note 26) As at 31 March 2006 As restated accelerated capital allowances £’000 882 8 (37) 853 20 Pension schemes The Group operates two defined contribution pension schemes. The pension cost charge for the period represents contributions payable by the Group to the schemes and amounted to £138,000 (2005: £66,000). There were no outstanding or prepaid contributions at either the beginning or end of the financial year. Adoption of FRS 17 The Board fully adopted FRS 17 ‘Retirement Benefits’ from 1 April 2005. A summary of the fair value of the net pension schemes deficit is set out below: Pension scheme deficit: Falkland Islands Company Limited Scheme Portsmouth Harbour Ferry Company Limited Scheme Deferred tax Net pension scheme deficit 2006 £’000 (2,107) (471) (2,578) 669 (1,909) As restated 2005 £’000 (2,141) (290) (2,431) 783 (1,648) The Falkland Islands Company Limited Scheme 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 the service of the Company at normal retirement age. FALKLAND ISLANDS HOLDINGS PLC 41 20 Pension schemes CONTINUED The latest full actuarial valuation was carried out at 31 March 2005 and was updated for FRS 17 purposes to 31 March 2006 by a qualified independent actuary, Lane Clark & Peacock LLP. The major assumptions used in this valuation were: Rate of increase in salaries Rate of increase in pensions in payment and deferred pensions Discount rate applied to scheme liabilities Inflation assumption 2006 2005 2004 4.0% 3.0% 5.0% 3.0% 4.0% 3.0% 5.4% 3.0% 3.5% 3.0% 6.5% 2.5% The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Scheme liabilities The present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Present value of scheme liabilities Related deferred tax asset Net pension liability Value at Value at Value at 2006 £’000 (2,107) 527 (1,580) 2005 £’000 (2,141) 696 (1,445) 2004 £’000 (2,063) 670 (1,393) During the year the corporation tax rate in the Falkland Islands reduced from 32.5% to 25%. This resulted in a reduction of the deferred tax asset of £161,000. Movement in deficit during the year: Deficit in scheme at beginning of year Current service cost Pensions paid Other finance cost Actuarial gain / (loss) 2006 £’000 2005 £’000 (2,141) (2,063) (19) 92 (96) 57 (20) 84 (91) (51) Deficit in the scheme at the end of the year (2,107) (2,141) Analysis of other pension costs charged in arriving at operating profit: Current service cost 2006 £’000 19 2005 £’000 20 42 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 20 Pension schemes CONTINUED 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: Experience gains arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial gain / (loss) recognised in statement of total recognised gains and losses History of experience gains and losses: 2006 £’000 96 2006 £’000 80 (23) 57 2005 £’000 91 2005 £’000 – (51) (51) Experience gains and losses on scheme liabilities: Amount (£’000) Percentage of year end present value of scheme liabilities 80 3.7% – – – – – – 2006 2005 2004 2003 Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of year end present value of scheme liabilities (23) (1.1)% (51) (2.3)% 49 2.3% 25 1.7% Portsmouth Harbour Ferry Company Plc (1975) Retirement Fund On 9 December 2004 the Group acquired Portsmouth Harbour Ferry Company Limited. This Company operated a defined benefit scheme. The scheme has been closed for many years and none of the current employees are earning benefits under the scheme. Actuarial reports for FRS 17 purposes as at 31 March 2006 and 31 March 2005 were prepared by a qualified independent actuary, Alexander Forbes Limited. The major assumptions used in this valuation were: Rate of increase in pensions in payment and deferred pensions Discount rate applied to scheme liabilities Inflation assumption 2006 2005 3.0% 4.9% 3.0% 3.0% 5.0% 3.0% The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. FALKLAND ISLANDS HOLDINGS PLC 43 20 Pension schemes CONTINUED Scheme assets The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Equities Fixed interest Other Total market value of assets Present value of scheme liabilities Deficit in the scheme – pension liability Related deferred tax asset Net pension liability The expected rates of return on the assets in the scheme were: Equities Fixed interest Other Movement in deficit during the year: Deficit in scheme at beginning of year Acquisition in the year Fair value adjustment (see note 26) Contributions paid Other finance cost Actuarial loss Value at Value at 2006 £’000 133 17 6 156 (627) (471) 142 (329) 2005 £’000 91 34 – 125 (415) (290) 87 (203) Long term Long term rate of return 2006 7.5% 5.0% 4.5% 2006 £’000 (290) – (84) 3 (12) (88) rate of return 2005 7.7% 5.0% 4.75% 2005 £’000 – (290) – – – – Deficit in the scheme at the end of the year (471) (290) Analysis of amounts included in other finance costs: Expected return on pension scheme assets Interest on pension scheme liabilities 2006 £’000 9 (21) (12) 2005 £’000 – – – 44 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 20 Pension schemes CONTINUED Analysis of amount recognised in statement of total recognised gains and losses: Actual return less expected return on scheme assets Experience gains and losses arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial loss recognised in statement of total recognised gains and losses History of experience gains and losses: Difference between the expected and actual return on scheme assets: Amount (£’000) Percentage of year end scheme assets Experience gains and losses on scheme liabilities: Amount (£’000) Percentage of year end present value of scheme liabilities Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of year end present value of scheme liabilities 2006 £’000 19 (72) (35) (88) 2005 £’000 – – – – 2006 2005 19 12.2% (72) (15.2%) (88) (18.7%) – – – – – – Actuarial information is only available for years ended 31 March 2005 and 31 March 2006 therefore no historical data has been disclosed. Prior year adjustments (Pension schemes) Operating profit adjustment Interest Taxation Adjustments for the year Profit previously reported Revised profit for the financial year Other recognised gains and losses previously reported Actuarial loss Movement on deferred tax asset relating to pension scheme Other recognised gains and losses Pension scheme deficit per FRS17 as at 1 April 2005 Pension liability previously provided Increase in pension liability and reduction in equity shareholders’ funds as at 1 April 2005 £’000 100 (91) 3 12 589 601 – (51) 17 (34) (1,648) 1,013 (635) FALKLAND ISLANDS HOLDINGS PLC 45 21 Called up share capital Authorised: 10,000,000 (2005: 10,000,000) ordinary shares of 10p each 1,000 1,000 Allotted, called up and fully paid: 8,381,238 (2005: 8,379,480) ordinary shares of 10p each 838 838 Group and Company 2006 £’000 2005 £’000 A total of 303,103 (2005: 160,075) 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 ‘Director’s interests in shares’ on pages 20 and 21. In addition, there were 81,972 (2005: 84,132) share options outstanding under the Company’s Saving Related Share Option Scheme at 31 March 2006. These options have an exercise price of 175p and are exercisable on or after 1 April 2006. 22 Reserves Group At 1 April 2005 Prior year adjustment – FRS 17 Prior year adjustment – FRS 21 At 1 April 2005 as restated Premium on shares issued in the year, net of expenses Retained profit for the year Dividends Actuarial loss on pension net of tax Share premium account £’000 7,061 – – 7,061 3 – – – Other reserves £’000 703 – – 703 – – – – At 31 March 2006 7,064 703 Revenue reserves £’000 2,322 (635) 502 Total £’000 10,086 (635) 502 2,189 9,953 – 2,714 (502) (154) 4,247 3 2,714 (502) (154) 12,014 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 2006 the plan held 55,417 (2005: 55,417) ordinary shares at an average cost of £83,000 (2005: £83,000). The market value of the shares at 31 March 2006 was £198,116 (2005: £331,000). 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 in the ESOP have had their rights to dividends waived, as in prior years. In the prior year a debit reserve for own shares of £83,000 was shown separately from profit and loss reserves of £2,405,000. In order to better present the reserves the own share reserve, which reduces distributable reserves, is now incorporated in the revenue reserve. This presentational charge has no effect on the reserves available for distribution. FALKLAND ISLANDS HOLDINGS PLC 47 24 Operating lease commitments Annual commitments under non-cancellable operating leases are as follows: Group 2006 2005 Land and buildings £’000 Other operating leases £’000 Land and buildings £’000 Other operating leases £’000 – 30 – 30 3 – – 3 – 30 26 56 3 21 – 24 Operating leases which expire: Within one year In the second to fifth years inclusive Over five years The Company had no operating lease commitments. 25 Capital commitments Contracted amounts not provided in these financial statements are: – 130 – – Group Company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 26 Purchase of subsidiary Provisional fair values allocated to the acquisition of Portsmouth Harbour Ferry Company Limited in December 2004 were reported in the financial statements for the year ended 31 March 2005. The fair value of the assets acquired has been revised in accordance with FRS 7 ‘Fair values in acquisition accounting’, from £3,324,000 to £3,224,000. The revision is due to: Reduction of tangible fixed assets on reassessment of useful economic life Deferred taxation adjustment in respect of the above Release of tax payable provision not required Increase in pension scheme liability Reduction in net assets acquired Adjustment to cost of investment Adjustment (increase) to goodwill £’000 (123) 37 70 (84) (100) 53 (47) 46 ANNUAL REPORT 2006 Notes to the Financial Statements CONTINUED 22 Reserves CONTINUED Company At 1 April 2005 Prior year adjustment – FRS 21 At 1 April 2005 as restated Premium on shares issued in the year, net of expenses Retained profit for the year Dividends At 31 March 2006 Share premium account £’000 7,061 – Other reserves £’000 5,389 – Revenue reserves £’000 1,970 (363) Total £’000 14,420 (363) 7,061 5,389 1,607 14,057 3 – – – – – 7,064 5,389 – 2,733 (502) 3,838 3 2,733 (502) 16,291 A profit of £2,733,000 (2005 as restated: £1,518,000) has been dealt with in the accounts 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. 23 Reconciliation of movement in shareholders’ funds Opening shareholders’ funds as previously reported 10,924 2006 £’000 Prior year adjustment – FRS 17 Prior year adjustment – FRS 21 Opening shareholders funds as restated Profit for the financial year Dividends Other recognised gains and losses Issue of shares Sale of own shares (635) 502 10,791 2,714 (502) (154) 3 – Group Company 2005 £’000 3,515 (613) 351 3,253 601 (369) (34) 7,228 112 2006 £’000 15,258 – (363) 14,895 2,733 (502) – 3 – 2005 £’000 6,713 – (307) 6,406 1,518 (369) – 7,228 112 12,852 10,791 17,129 14,895 48 ANNUAL REPORT 2006 Directors and Corporate Information Directors David Hudd Chairman John Foster Managing Director Leonard Licht* Sir Harry Solomon* Mike Killingley* *Non-executive Directors Web site www.fihplc.com Corporate information Company Secretary and Registered Office Mike West, Charringtons House, The Causeway, Bishop’s Stortford, Hertfordshire CM23 2ER Telephone: 01279 461630 Fax: 01279 461631 Email: admin@fihplc.com Registered number 03416346 Stockbroker KBC Peel Hunt 111 Old Broad Street, London EC2N 1PH Solicitors Addleshaw Goddard 100 Barbirolli Square, Manchester M2 3AB Bircham Bell and Dyson 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 17 Grosvenor Gardens, London SW1W 0BD 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 Carl Roberts Financial Director Ana Crowie Financial Controller Web site: www.gosportferry.co.uk n o d n o L , t n i r P e t a r o p r o C e l y o R y b d e t n i r P www.fihplc.com