Falkland Islands Holdings plc Annual Report 2007 Contents 1 2 3 Financial Highlights Chairman’s Statement Managing Director’s Business Review 11 Board of Directors and Secretary 12 Directors’ Report 17 Independent Auditor’s Report 18 Group Profit and Loss Account 19 Group Balance Sheet 20 Company Balance Sheet 21 Group Cash Flow Statement 22 Consolidated Statement of Total Recognised Gains and Losses 23 Notes to the Financial Statements 44 Directors and Corporate Information Financial Highlights FALKLAND ISLANDS HOLDINGS PLC 1 2007 £’000 2006 £’000 Turnover from continuing operations 15,618 15,209 Profit before tax Underlying profit before tax* Diluted earnings per share before goodwill amortisation and exceptional items as above Dividend per share Cash flow from operations Net asset value per share at cost 1,840 1,664 13.4p 7.0p 2,303 167p 3,018 1,490 12.0p 6.5p 1,665 153p Change % 2.7 (39.0) 11.7 11.7 7.7 38.3 9.2 Net asset value per share with investments in FOGL and FGML shown at market value 292p 400p (27.0) *Defined as profit before tax, goodwill amortisation and exceptional items. The investment in Falkland Oil and Gas (FOGL) is shown in the financial statements at its cost of £2.4m. FOGL is listed on AIM and the market value of the Group shareholding at 31 March 2007 was £13.0m. Turnover from continuing operations (£’000) Underlying profit before tax* (£’000) 15,209 15,618 1,664 1,490 11,447 11,082 12,206 1,025 972 847 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Diluted earnings per share (pence) before goodwill amortisation and exceptional items 12.0 11.2 9.4 9.0 13.4 Dividend per share (pence) 5.75 6.00 5.50 7.00 6.50 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2 ANNUAL REPORT 2007 Chairman’s Statement We were pleased to note that our view on the potential is shared by others as FOGL was able to raise a further £8 million in December 2006 which has been used to finance further offshore exploration, this comprises a further 2D seismic survey and sea bed logging. We are awaiting the results of this work and of the continuing efforts to secure a drilling rig. Earnings and dividends Earnings per share on underlying profits rose by 9.8% to 13.4p per share (2006: 12.2p) and EPS calculated on all earnings including profits on the sale of investments were David Hudd Chairman Overview I am pleased to report that the year to 31 March 2007 has 17.2p per share (2006: 31.8p). been another year of progress for your Company with record levels of profitability achieved from trading and a useful profit from the sale of investments. Trading In the year to 31 March 2007 the Group’s underlying profit (defined as profit before tax, exceptional items and the amortisation of goodwill), rose from £1.49 million in 2006 to £1.66 million. Profit before tax after exceptional items and the amortisation of goodwill was £1.84 million (2006: £3.0 million). Reflecting the continued confidence of your Board in the future of the Company it is proposed to increase the annual dividend by 7.7% from 6.5p to 7.0p per share. Net assets The Group has a solid base of well established trading businesses and good liquidity position. At 31 March 2007 the Group had net cash balances of £2.2 million (2006: £0.3 million) and shareholders funds of £14.1 million at historic cost (2006: £12.9 million). This includes the investment in FOGL with a cost of £2.4 million which After the seasonally slower first half, our businesses in the compares to a market value at the year end of Falklands performed well, with strong vehicle sales and £13.0 million (2006: cost £2.4 million; market value general activity was buoyed by the interest surrounding £21.5 million). On this basis the net asset value per share the 25th anniversary of the war. The Portsmouth Harbour at 31 March 2007 was £2.92 (2006: £4.00). ferry business had a solid year with profits only a little lower than last year which benefited from the Trafalgar celebrations. Investments People The Group continues to move forward because of the commitment of all its staff and we are fortunate to have the services of a highly professional workforce many of In January 2007 the 14.4% shareholding in Falkland Gold whom have worked for the Company for many years. and Minerals was sold at a price of 6p per share. The cash Their passion in delivering a high quality service to their proceeds of £0.7 million generated a profit over the cost customers underpins the strength of the Group and I of our investment of £0.5 million. would like to thank them all for their efforts in producing The Group retains its investment of 15 million shares another successful year of growth. (16.3%) in Falkland Oil and Gas (FOGL). As shareholders Outlook will appreciate, your Company was actively involved in the The new financial year has started in promising fashion initial formation of FOGL and its subsequent admission to and we are well placed to build on the solid progress seen AIM and your Board continues to believe in the in recent years. Company’s potential. As FOGL’s license area is very large and unexplored, exploration is necessarily a lengthy and expensive process. FOGL is continuing to progress its exploration programmes and we intend to retain a substantial shareholding while the exploration effort continues. David Hudd Chairman 13 June 2007 Managing Director’s Business Review FALKLAND ISLANDS HOLDINGS PLC 3 Falkland Islands Holdings (FIH) owns two trading businesses: the Falkland Islands Company (FIC) in the Falkland Islands, which provides a wide range of essential goods and services to the Islanders; and in the UK, the Portsmouth Harbour Ferry Company (PHFC) which provides the vital passenger service across the mouth of Portsmouth Harbour. Both have been established for well over 100 years and both have a history of consistent profitability and cash generation. Group performance In the year to 31 March 2007 turnover from continuing activities in the Group’s trading businesses rose by 2.6% to £15.6 million (2006: £15.2 million). Progress was seen at both businesses. The Falkland Islands Company recovered from a sluggish start and revenue increased by 2.5% from £11.9 million to over £12.2 million. Revenue at PHFC increased to £3.4 million (2006: £3.3 million) a satisfactory performance given the absence of the maritime festivals which boosted revenue in 2005/6. Revenue (continuing operations) Year ended 31 March Falkland Islands Gosport Ferry Total revenue 2007 £m 12.2 3.4 15.6 2006 £m 11.9 3.3 15.2 Change % 2.5 3.0 2.6 Revenue split: FIC • PHFC • £3.4m £3.3m £12.2m £11.9m John Foster Managing Director Underlying profits before tax, amortisation and exceptional items A healthy 11% increase in underlying profits (defined as profit before tax, the amortisation of goodwill and exceptional items) was achieved in the year to 31 March 2007, underlying profits rose to £1.66 million (2006: £1.49 million) with a strong performance from the Group’s Falkland business and a solid contribution in the UK from the ferry operations at Portsmouth Harbour. 2007 £m 1.10 0.56 1.66 (0.20) (0.11) 0.49 1.84 2006 £m 0.86 0.63 1.49 (0.20) (0.49) 2.22 3.02 Year ended 31 March Falkland Islands Gosport Ferry Underlying profit Amortisation Exceptional costs Profit on sale of investments Profit before tax Underlying profit: FIC • PHFC • 2007 2006 £0.56m £0.63m £1.10m £0.86m 2007 2006 4 ANNUAL REPORT 2007 Managing Director’s Business Review CONTINUED Exceptional items Portsmouth Harbour Ferry Company (PHFC) During the year the decision was taken to close the PHFC performed well in the year despite the absence of Falkland Islands’ defined benefit pension scheme in the Trafalgar 200 celebrations and International Festival respect of future service for existing members and in of the Sea, which boosted revenues and profits in the consultation with the employees it was agreed to move to prior period. In August 2006 the Company was successful a defined contribution basis. The effect of this is a in winning a contract from Berkeley Homes to provide significant reduction in the exposure of the Group to water taxi services from its new residential development further increases in pension liabilities. In the current year overlooking the harbour at Royal Clarence Yard to the these changes have resulted in a one off exceptional Company’s pontoon at Portsea. The service, which runs charge of £105,000. Profit on the sale of investments On 12 January 2007 the Group sold its entire shareholding in Falkland Gold and Minerals (FGML). The sale of its 14.4% holding at 6p per share generated net cash proceeds of £675,000 and a profit on sale of £485,000. Profit before tax After taking account of charges for the amortisation of goodwill, the exceptional pension charge and profits on the sale of investments which in aggregate represent a net credit of £176,000, the Group’s profit before tax for the year was £1.84 million (2006: £3.0 million). Group structure In operational terms the Group structure was unchanged. during peak times five days a week, does not directly compete with the PHFC’s core ferry services which operate from Gosport. During the year leisure cruising and private hire services continued, but revenues from cruising were disappointing so this activity has been scaled back, allowing PHFC to focus on core ferry operations and increasing availability for corporate hire. During the year ended 31 March 2007 PHFC carried nearly 3.6 million passengers across the harbour, although passenger numbers were marginally lower than the exceptionally high figures seen during the maritime celebrations in 2005. As in the prior year, fares were increased on 1 June 2006, with normal daily adult return fares increased by 11% to £2.00. This enabled the Company to freeze fares During the year the Group sold its investment in FGML for regular users and to hold the price of ten-trip but retained its shareholding in FOGL holding 15 million tickets at £8.00 or 80p each way. In addition, to reinforce shares (16.3%) in this AIM-listed exploration company. the value for money offered to our passengers, ten-trip Falkland Islands Holdings plc The Falkland Islands Company Limited Percentage of shares held 100% The Portsmouth Harbour Ferry Company Limited Percentage of shares held 100% Falkland Oil and Gas Limited Percentage of shares held 16.3% FALKLAND ISLANDS HOLDINGS PLC 5 PORTSMOUTH PORTSMOUTH HARBOUR HARBOUR Gosport Gosport •• •• Portsmouth Portsmouth Scale (miles) 0 1 2 concessionary fares for children and seniors were frozen at £4.40 or 44p per trip. With overall passenger numbers down on the prior year, the fare increases seen in June 2006 produced a modest overall increase in passenger revenues. office costs, the underlying profit before tax of the ferry operations amounted to £0.55 million (2006: £0.63 million). The ferry pontoon at the Gosport terminus is coming to the end of its useful life and the pontoon owners, Gosport Borough Council, are moving ahead with plans to replace it with a new stucture before the end of 2008. The financing of the replacement pontoon remains under discussion but maintenance of the existing arrangements, with a nominal rent payable by the ferry company, would allow PHFC to continue to provide this essential service safely and reliably, whilst still providing excellent value for money to passengers. Local residents are aware of the benefits of the service PHFC offers. The ferry trip is not only significantly shorter than the land journey around the north of the harbour, but with ever increasing petrol costs it is also significantly cheaper. The ferry is also a more environmentally friendly means of transport with a carbon footprint per passenger less than 3% of that of a car. In May 2007 PHFC ran 2006/7 saw continued inflationary pressures on operating a special offer highlighting the ferry’s green credentials to costs and particularly large increases were seen in encourage more car drivers to leave their car at home and fuel prices over the year. After the allocation of head instead make their journey on the Gosport ferry. The Spirit of Gosport crossing Portsmouth Harbour. 6 ANNUAL REPORT 2007 Managing Director’s Business Review CONTINUED Falklands operations Total revenue in the Group’s Falklands businesses in the year to 31 March 2007 increased by 2.5% to £12.2 million (2006: £11.9 million). Split in turnover 2006 – 2007: Retailing• Other • STANLEY • STANLEY • 20% 80% Scale (miles) 0 30 60 Retailing – sales £9.8 million (2006: £9.4 million) Retailing is the most important business activity undertaken by the Group in the Falklands and accounts In the Islands the general economic backdrop was helped for over 80% of turnover. initially by a better Illex squid catch in the early part of the financial year. Retailing remain competitive, but in Stanley the increased tourist activity associated with the 25th anniversary of the Falklands War helped provide a boost to the Group’s other operations, particularly the Capstan gift shop, Penguin Travel and the Upland Goose Hotel. Significant fleet vehicle sales boosted results in the second half of the year. After allocating head office costs, which are integral to In the year to 31 March 2007 overall retail sales increased by 4.2% to £9.8 million and the bulk of the increase was accounted for by the Company’s automotive dealership. Sales at the flagship West Store continued to move ahead although competition from local independent retailers and the subdued economic conditions meant that like for like sales growth was restricted to 0.4%. Sales at the Capstan gift shop were helped by the continued growth in the number of cruise ship visitors and revenues the management and operation of the Group’s Falklands increased by 3.3% compared to the prior year. At the business activities, underlying profit before tax and Group’s DIY business, Homecare, trading conditions were exceptional items rose from £0.9 million to £1.1 million. more difficult with a sluggish housing market and Land Rover Freelander as supplied by FIC. FALKLAND ISLANDS HOLDINGS PLC 7 customers experimenting with internet purchasing from profitability and the effective management of working UK suppliers, particularly for higher value items. Sales at capital. Homecare were 5.9% lower in the year although it was encouraging to note that performance recovered towards the end of the year with double digit increases in sales being seen as Homecare’s product range was refreshed and improved. At its automotive dealership, FIC had a very successful year with unit vehicle sales increasing by 120%. Other activities – sales £2.4 million (2006: £2.5 million) Tax payments decreased from £391,000 to £338,000 in the year as the result of a repayment of tax in the UK and cash dividends paid rose to £545,000 as the dividend increased to 6.5p per share. During the year £282,000 was invested in capital expenditure to replace worn out plant and machinery and to maintain and enhance the infrastructure of operating businesses. The sale of the investment in FGML further boosted cash reserves and net bank interest paid fell to only £31,000 (2006: Overall sales in the Company’s other activities fell slightly £165,000) as borrowings were reduced. With the in the year to £2.4 million. Low margin stevedoring at the continued strengthening of its liquidity position, surplus Stanley floating port FIPAS was scaled back, and the cash resources were invested at attractive commercial volume of third party freight carried by Darwin Shipping rates in excess of UK Base Rate. fell, but the overall change in the mix of revenue was positive, and the contribution to Group profits from other activities increased during the year. The Fishing Agency had a better year with a recovery in the squid catch in Spring 2006 leading to a healthy increase in the number of fishing vessels requiring support services from FIC. The Illex squid catch was the best for four years and revenue from Agency activities increased by over 35% boosting profitability. FIC’s insurance agency, property rental activities and stevedoring services all saw growth in the year. Darwin Shipping continued to work with the UK Ministry of Defence chartering space on its supply vessels and with a tight control of costs and more efficient management of container rentals, Darwin had another solid year. The Upland Goose Hotel continues to face strong local competition and is loss making during the quiet winter period, but this year the increased number of visitors over the summer months linked to Falklands 25, helped lift revenues and saw the hotel move closer to a break even position for the year. These positive factors are unlikely to Cash flows before financing increased sharply from £0.7 million to £1.8 million in the year to March 2007. Bank loan repayments of £0.5 million were made during the year and the Group ended the year in a strong financial position with cash balances of £5.0 million and net cash balances (cash less outstanding bank borrowings) of £2.2 million (2006: £0.3 million). Balance sheet Intangible assets of £3.8 million (2006: £4.0 million) relate principally to goodwill on the acquisition of PHFC in 2004 which is being amortised over a period of 20 years. With the adoption of International Financial Reporting Standards in the next financial year the carrying value of goodwill will be reviewed on an annual basis and the fixed annual charge will disappear. Tangible assets decreased marginally to £7.9 million (2006: £8.0 million). During the year fixed asset additions of £0.3 million were made to improve the infrastructure of the operating companies compared to depreciation charges of £0.4 million. continue in the medium term and given the recent history Stock levels were reduced again in the year from of losses at the hotel the Group will be considering its £3.1 million to £2.7 million as the Group held lower future over the next 12 months. Cash flow buffer stocks following the introduction of more regular freight shipments using Ministry of Defence vessels. The Group experienced a strong positive cash flow in the Trade debtors relate largely to fishing licence fees for year to March 2007. Net cash flow from operating activities increased sharply in the year rising to over which FIC acts as the collection agent and as at 31 March 2007 overall trade debtors increased from £1.1 million to £2.3 million compared to only £1.7 million in the prior £2.1 million reflecting the changing pattern of squid year reflecting the increase in the Group’s underlying fishing in the months just prior to the year end. 8 ANNUAL REPORT 2007 Managing Director’s Business Review CONTINUED The Group’s cash and liquidity position improved Past service benefits of employees were crystallised as significantly in the year with an increase in cash of part of the arrangements although this cost was partially £1.4 million to £5.0 million and an overall rise in net cash offset by a curtailment gain on closure of the scheme to balances (cash less outstanding bank borrowings) from further accrual and an increase in long term discount £0.3 million to £2.2 million. Although the Group is in a rates which had a dampening effect on net liabilities (see position readily to repay all of its bank borrowings, the note 20 on page 35). Board took the decision to retain its strong cash position in order to maximise flexibility. During the year the level of net liabilities in the PHFC scheme decreased, reflecting additional funding Creditors due within one year increased by £0.5 million payments, improved investment performance and an from £4.8 million in March 2006 to £5.3 million, due increase in long term bond rates. principally to extended credit arrangements with long standing suppliers. Creditor balances due after one year were reduced from £2.8 million at 31 March 2006 to £2.2 million as the Group made scheduled repayments of its medium term loans and loan notes. Provisions for liabilities and charges relate to deferred tax balances and decreased marginally in the year to £0.7 million. Long term liabilities due under the Group’s defined Equity Shareholders’ funds grew in the year from £12.9 million to £14.1 million boosted by profit on ordinary activities after tax of £1.45 million and share options subscriptions of £0.15 million, less dividends paid of £0.55 million. At 31 March 2007 net assets per share at cost were 167p per share (2006: 153p per share). Valuing the investment in FOGL at market value, net assets per share was 292p per share at 31 March 2007 (2006: 400p). benefit pension schemes decreased in the year from Falkland Oil and Gas (FOGL) £1.91 million to £1.87 million as at 31 March 2007. The Group continues to hold a strategic stake in FOGL The pension schemes in both the UK and the Falkland Islands have been closed to new members for many years and on 31 March 2007 the Falklands scheme was closed with its holding of 15 million shares representing a 16.3% interest. At 31 March 2007 the market value of this shareholding was £13.0 million (2006: £21.5 million). to further accruals for all current employees. As from During the year FOGL made further progress with its 1 April 2007 existing employees previously in the final programme of exploration. In November 2006 TRACS salary scheme transferred to a defined contribution International completed an independent review of what it scheme linked to their current salary. considers to be the Company’s top ten prospects and FOGL seismic vessel, Bergen Surveyor, in the Falklands. FALKLAND ISLANDS HOLDINGS PLC 9 reported that FOGL had net prospective resources in businesses. In the Falklands FIC faces effective local excess of 10 billion barrels. The existence of commercial competition in almost every area of its operations, but quantities of oil or gas can only be determined by drilling, because of the Company’s long-established position and but during the year the Company made good progress in accumulated expertise, in most sectors FIC has the largest raising further funds to continue with its exploration market share. The situation is dynamic and maintaining programme, with the issue of £8 million of convertible leadership depends on continued innovation, investment loan notes in December 2006. and a commitment to excellence in customer service. FOGL has also completed the third phase of its 2D seismic For our ferry operations in Portsmouth the situation is programme with the object of acquiring a further different. Although there is no other directly competing 9,950km of detailed infill seismic data, and early ferry operator, customers do have a choice and can travel indications are that it will provide a much higher by car or public transport to make their journey. definition of FOGL’s best prospects. This programme was Maintaining and promoting the relative attractions of supplemented in February 2007 when the Company using the ferry whether for commuting to work, shopping commenced a programme of Closed Source Electro or for tourist sight-seeing is a key element of our long Magnetic (CSEM) surveying, a new technology designed term strategy and the Company will continue to work to reduce risk and help highlight the best prospects closely with local authorities and other public transport for drilling. The first phase, which covered six prospects, providers to underline its position as a more has been completed and the second phase is expected environmentally friendly, faster and more cost effective to be completed by the end of July 2007. Once alternative to travelling by car in the years ahead. processing of the data from both surveys is complete, the results will be integrated, a process which will take several months. If the results are positive this will then lead to the determination of a shortlist of the best prospects for drilling. Key performance indicators At a Group level management attention is focussed on revenue, costs and the contribution generated by each sub-group of businesses. In the Falklands, businesses’ like-for-like revenue growth is a key measure of In parallel with the exploration programme FOGL has performance, especially for our retail outlets which continued discussion with farm-in partners and rig account for over 80% of sales. In addition to sales trends, owners. The objective remains a drilling programme gross margins by product and general costs are also kept commencing in 2008. under close review. Business drivers, risk factors and key performance indicators Business drivers The Group’s businesses have strong ties to the local communities they serve. As consumer oriented businesses their success is linked closely to the general economic At PHFC, passenger numbers and the average fare yield are monitored on a weekly basis, and close attention is paid to ferry reliability and passenger safety, as well as a more traditional focus on costs and net profitability. Impact of adopting International Financial Reporting Standards conditions in their local markets. Inflation, employment Introduction levels, interest rates and government spending As an AIM-quoted company, Falkland Islands Holdings plc programmes all have an effect on disposable income and will be required to report under International Financial consumer confidence and this in turn drives local demand Reporting Standards (‘IFRS’) for the first time in the for our goods and services. In addition, in both the financial year ending 31 March 2008. Interim results for Falklands and at Gosport, revenues are boosted by wider the six months to 30 September 2007 will be published tourist activity and both locations have benefited from under IFRS. increasing tourist numbers. Risk factors In anticipation of this change Falkland Islands Holdings plc has commenced the transition of its accounting policies As well as changes to local economic conditions the level and financial reporting from UK generally accepted of local competition also affects the performance of our accounting principles (‘UK GAAP’) to IFRS. The Company 10 ANNUAL REPORT 2007 Managing Director’s Business Review CONTINUED has allocated internal resources and engaged an expert Taxation consultant to identify and assess the key areas which will Under IFRS the Group will be required to provide for be affected by IFRS adoption. Priority has been given to preparation of an opening balance sheet in accordance with IFRS1 ‘First-time adoption of International Financial Reporting Standards’ as at 1 April 2006. This will form the basis for accounting under IFRS in the future, and is required when the Group taxation on any difference between the accounting and taxable base of every item in the financial statements. In addition, a deferred tax provision will be made on any revaluation of non-monetary assets (e.g. land and buildings), whether or not there is an intention to sell the asset. prepares its first fully IFRS compliant financial statements Investment property for the year ending 31 March 2008. The restated opening On conversion to IFRS the Group will reclassify properties balance sheet will be published on the Company’s held for rental in Stanley and land held for capital website in October 2007 in advance of the publication of appreciation in the Falkland Islands as investment interim results. Anticipated impact Set out below are the major areas where accounting policies will change, together with a preliminary estimate of the impact of these changes on the reported financial performance of Falkland Islands Holdings plc. Goodwill amortisation Under IFRS, goodwill will no longer be amortised, but its carrying value will instead be subject to an annual impairment test. This approach will be a change to the Group’s existing policy which amortises goodwill over its useful life, subject to a maximum write off period of 20 years. Under the new policy goodwill will no longer be amortised but will be written-down to the extent, if any, property. On reclassification IAS40 requires investment property to be recognised at fair value. Thereafter the Company will elect to measure all investment property using the cost model, with a carrying value of deemed cost at the transition date less accumulated depreciation and less any accumulated impairment charges. It is antipated that recognition of investment property at fair value as deemed cost at the transition date will increase net assets by approximately £1.5 million. Transition timetable The Group will publish a definitive IFRS transition statement on its website in October 2007 prior to publication of its interim financial statements, which will be issued under IFRS in December 2007. that it is impaired. In the absence of any impairment this will have the effect of increasing reported profit before Trading Outlook for 2007/8 With a stable economic climate in the UK and in the tax by £0.2 million per annum. Fixed asset investments The Group holds 15 million ordinary shares in AIM-quoted FOGL, and this investment is currently held in the balance sheet, under UK GAAP, at historical cost. Under IFRS, the Group’s fixed asset investments will be stated in the financial report at fair value, in the case of AIM-quoted FOGL at market value. Unrealised gains and Falklands the prospects for further steady growth over the medium term are good. In the current year the Falklands businesses have started well, with squid catches in the April and May exceeding 2006’s. In Portsmouth, ferry passenger numbers have been boosted by the recent sunny spring weather and are ahead year on year. Although cost pressures exist in both businesses with further investment in our infrastructure planned for the current year, the foundations are in place for another solid losses in any accounting period will be transferred to a performance. revaluation reserve, as part of shareholders’ funds. On disposal, or impairment, the amounts previously recognised as shareholders’ funds will be transferred to the profit and loss account in the period. This will have the effect of increasing the Group’s net assets on transition to IFRS at 1 April 2006 by £20.7m. John Foster Managing Director 13 June 2007 Board of Directors and Secretary FALKLAND ISLANDS HOLDINGS PLC 11 David Hudd (62) 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 Deputy Chairman of both Falklands Oil and Gas Limited and Falkland Gold and Minerals Limited. John Foster (49) 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 (62) 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 (70) 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 (56) 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. James Ivins (42) Company Secretary James joined the Group as Company Secretary on 26 February 2007. He was educated at Oxford University and is a Fellow of the Chartered Association of Certified Accountants. James commenced his career in the City of London and has over a decade of international business experience with public and private companies. 12 ANNUAL REPORT 2007 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 2007. Results and dividend The Group‘s result for the year are set out in the Group profit and loss account on page 18. Group profit for the year after taxation amounted to £1,446,000 (2006: £2,644,000). Basic earnings per share were 17.2p (2006: 31.8p). The Directors recommend a dividend of 7.0p per share (2006: 6.5p) which, if approved by shareholders at the forthcoming Annual General Meeting will be paid on 2 November 2007 to shareholders on the register at close of business on 5 October 2007. This has not been included in creditors as it was not approved before the year end. Dividends paid during the year comprise a dividend of 6.5p per share in respect of the previous year ended 31 March 2006. Principal activities and business review The business of the Group during the year ended 31 March 2007 was general trading in the Falkland Islands and the operation of a passenger ferry service across Portsmouth Harbour. The principal activities of the Group are discussed in more detail in the Business Review on pages 3 to 10 and should be considered as part of the Directors‘ Report for the purposes of the requirements of the enhanced Directors‘ Report guidance. The principal activity of the Company is that of a holding Company. 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 14 and 15. 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. 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 35 to 39. Share capital and substantial interests in shares During the year 93,472 share options were exercised. There have been no changes to the authorised share capital which remains at 12,500,000 ordinary shares. Further information about the Company’s share capital is given in note 21 on page 39. Details of the Company’s executive share option scheme and employee ownership plan can be found on pages 14 and 15 and in note 23 on pages 41 and 42. The Company has been notified of the following substantial interests in the issued ordinary shares of the Company as at 31 March 2007. FALKLAND ISLANDS HOLDINGS PLC 13 Substantial shareholdings Artemis Investment Management L S Licht Jupiter Asset Management AMVESCAP PLC Sir Harry Solomon INVESCO English & International Trust plc Number of shares Percentage of issued shares 995,902 791,250 543,988 490,587 430,027 365,557 11.76 9.34 6.42 5.79 5.08 4.32 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 2007 or 31 March 2006. Charitable and political donations Charitable donations made by the Group during the year amounted to £16,431 (2006: £9,745), largely to local community charities in Gosport and the Falkland Islands. Donations of £8,082 were made in the Falklands of which the largest was £5,000 to the Falkland Islands Commonwealth Games Association. Donations in the UK included £2,500 to sea rescue charities. There were no political donations. 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 College Hill, The Registry, Royal Mint Court, London EC3N 4QN on 11 September 2007 at 2.30pm. 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. 14 ANNUAL REPORT 2007 Directors’ Report CONTINUED Details of Directors’ remuneration and emoluments The remuneration of the non-executive Directors consists only of annual fees for their services both as members of the board and of the Committees on which they serve. An analysis of the remuneration and taxable benefits in kind (excluding share options) provided for and received by each Director during the year to 31 March 2007 and in the preceding year is as follows: Salary £’000 Bonuses £’000 Benefits £’000 Pensions share options £’000 £’000 Gains in respect of David Hudd John Foster Mike Killingley Leonard Licht Sir Harry Solomon Anthony Knightley 100 140 25 20 20 – 305 20 53 – – – – 73 – – – – – – – – 23 – – – – 23 9 – – – – – 9 2007 Total £’000 129 216 25 20 20 – 410 Directors’ interests in shares As at 31 March 2007, the share options of the executive Directors may be summarised as follows: Date of grant 15 Aug 2002 10 Feb 2005 10 Feb 2005 14 June 2005 13 July 2006 Share options Opening 1 April 2006 Total 1 April 2006 Exercised in the period Granted in the period Closing 31 March 2007 Total 31 March 2007 Scheme A A B A A B A Number of shares D L Hudd Number of shares J L Foster Exercise price Exercisable from 81,300 – £1.845 – – 33,775 £5.20 23,917 £5.20 49,411 14,117 £4.25 130,711 71,809 – – – – 15 Aug 2005 10 Feb 2008 10 Feb 2008 14 June 2008 59,843 28,346 £3,175 13 July 2009 12 July 2016 – 190,554 23,917 76,238 190,554 100,155 2006 Total £’000 150 198 25 20 20 195 608 Expiry date 14 Aug 2012 9 Feb 2015 9 Feb 2015 13 June 2015 Scheme A = executive share option scheme. Scheme B = Scheme approved by HMRC The mid-market price of the Company’s shares on 31 March 2007 was 240 pence and the range during the year was 227 pence to 380 pence. The Directors’ options extant at 31 March 2007 totalled 290,709 and represented 3.4% of the Company’s issued share capital. FALKLAND ISLANDS HOLDINGS PLC 15 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. 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 are shown below: David Hudd John Foster Mike Killingley Leonard Licht Sir Harry Solomon Ordinary shares at 31 March 2007 Ordinary shares at 31 March 2006 45,400 5,000 3,000 791,250 430,027 40,000 5,000 3,000 791,250 430,027 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 and applicable law (UK Generally Accepted Accounting Practice). 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. 16 ANNUAL REPORT 2007 Directors’ Report CONTINUED 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. James Ivins Secretary 13 June 2007 Charringtons House The Causeway Bishop’s Stortford Hertfordshire CM23 2ER FALKLAND ISLANDS HOLDINGS PLC 17 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 2007 which comprise the Group Profit and Loss Account, the Group and Company Balance Sheets, the Group Cash Flow Statement, the Group 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 pages 15 and 16. 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 Statement and Managing Director’s Review, that is cross referenced from the Business Review section of the Directors’ Report. In addition we 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 if it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements within it. 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 2007 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 13 June 2007 Nottingham 18 ANNUAL REPORT 2007 Group Profit and Loss Account FOR THE YEAR ENDED 31 MARCH 2007 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 Continuing operations Discontinuing operations Group operating profit Profit on sale of discontinued operation 13 Profit on sale of fixed asset investment 6 6 6 7 22 Bank interest receivable Bank interest payable Pension schemes net financing cost Profit on ordinary activities before taxation Taxation Profit on ordinary activities after taxation for the financial year 9 Earnings per share Basic Diluted 2007 £’000 As restated 2006 £’000 15,618 – 15,618 (9,531) 6,087 15,209 527 15,736 (9,855) 5,881 (4,606) (4,471) (204) (105) (204) (487) (4,915) (5,162) 338 1,510 – 1,510 – 485 205 (236) (124) 1,840 (394) 1,446 344 1,062 1 1,063 84 2,135 38 (194) (108) 3,018 (374) 2,644 17.2p 17.1p 31.8p 31.3p Proposed dividend per ordinary share 7.0p 6.5p In both the current and preceding years, there was no material difference between the result reported in the profit and loss account and the result on an unmodified historical cost basis. Group Balance Sheet AT 31 MARCH 2007 Notes 11 12 13 14 15 15 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors due within one year Debtors due after one year 18 Cash at bank and in hand FALKLAND ISLANDS HOLDINGS PLC 19 2007 2006 £’000 £’000 £’000 £’000 3,775 7,856 2,420 2,678 2,517 45 2,562 4,959 10,199 3,979 8,042 2,610 14,051 14,631 3,107 1,789 48 1,837 3,601 8,545 16 Creditors: amounts falling due within one year (5,310) (4,797) Net current assets Total assets less current liabilities 17 Creditors: amounts falling due after more than one year 19 Provisions for liabilities 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 24 4,889 18,940 (2,191) (744) 16,005 (1,869) 14,136 847 7,206 703 5,380 14,136 3,748 18,379 (2,765) (853) 14,761 (1,909) 12,852 838 7,064 703 4,247 12,852 The financial statements were approved by the Board of Directors on 13 June 2007 and were signed on its behalf by: J L Foster Managing Director 20 ANNUAL REPORT 2007 Company Balance Sheet AT 31 MARCH 2007 Notes £’000 £’000 £’000 £’000 2007 As restated 2006 Fixed assets 13 Investments Current assets Debtors Cash at bank and in hand 15 18 16 Creditors: amounts falling due within one year Net current assets 17,464 17,654 222 2,786 3,008 (641) 2,367 333 1,055 1,388 (781) 607 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 24 (757) 19,074 847 7,206 5,389 5,632 19,074 (1,132) 17,129 838 7,064 5,389 3,838 17,129 The financial statements were approved by the Board of Directors on 13 June 2007 and were signed on its behalf by: J L Foster Managing Director Group Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2007 Reconciliation of operating profit to net cash inflow from operating activities FALKLAND ISLANDS HOLDINGS PLC 21 Operating profit Profit on sale of fixed assets Amortisation of goodwill Depreciation and impairment charges Decrease in stocks Increase in debtors Increase / (decrease) in creditors and provisions Provisions for share-based payments Net cash inflow from operating activities Cash Flow Statement 2007 £’000 1,510 – 204 468 429 (725) 316 101 2,303 As restated 2006 £’000 1,063 (12) 204 838 201 (12) (687) 70 1,665 Cash flow from operating activities 2,303 1,665 Returns on investments and servicing of finance 2007 2006 £’000 £’000 £’000 £’000 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 and disposals Sale of subsidiary undertaking Dividends paid Cash inflow before financing Financing Repayment of secured loan Repayment of loan notes Issue of ordinary share capital New secured loan Cash flow from financing Increase in cash in the year 205 (236) (162) (176) (282) – – 675 – (532) (43) 151 – (31) 38 (203) (250) (141) (165) (338) (391) (505) (2,000) 15 2,427 178 (524) (43) 3 2,609 393 – (545) 1,782 (424) 1,358 (63) – 178 (502) 722 2,045 2,767 22 ANNUAL REPORT 2007 Group Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2007 – CONTINUED Reconciliation of cash flow to movement in net funds / (debt) Increase in cash in the year Cash outflow / (inflow) from movement in debt Change in net debt resulting from cash flows Net funds / (debt) at start of year Net funds at end of year Analysis of changes in net funds / (debt) Cash at bank and in hand Debt due within one year Debt due after one year Net funds at end of year 2007 £’000 1,358 575 1,933 293 2,226 Cash flows £’000 1,358 – 575 1,933 2006 £’000 2,767 (2,042) 725 (432) 293 As at 31 March 2007 £’000 4,959 (542) (2,191) 2,226 As at 1 April 2006 £’000 3,601 (542) (2,766) 293 Consolidated Statement of Total Recognised Gains and Losses FOR THE YEAR ENDED 31 MARCH 2007 2007 As restated 2006 £’000 £’000 £’000 £’000 Profit for the year 1,446 2,644 PHFC scheme gain / (loss) FIC scheme gain 61 118 (88) 57 Actuarial gain / (loss) on pension schemes (note 20) Decrease in deferred tax asset relating to pension scheme Actuarial gain / (loss) on pension schemes net of tax Total gains recognised since last annual report 179 (48) 131 1,577 (31) (123) (154) 2,490 Notes to the Financial Statements FOR THE YEAR ENDED 31 MARCH 2007 FALKLAND ISLANDS HOLDINGS PLC 23 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 standard has been adopted for the first time: • FRS 20 ‘Share Based Payments’ The impact on the profit and loss account is set out in note 23. The corresponding amounts are restated in accordance with the new policy. 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 2007 and comparatives for the year ended 31 March 2006. 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 of twenty years in accordance with FRS 10. In the Company’s financial statements, investments in subsidiary undertakings are stated at cost. Employee share awards The Group provides benefits to certain employees (including Directors) in the form of share-based payment transactions, whereby the employee renders services in exchange for shares or rights over future shares (‘equity settled transactions’). The cost of these equity settled transactions with employees is measured by reference to an estimate of their fair value at the date on which they were granted using an input option pricing model. For further details refer to note 23. The number of shares which will ultimately vest depends upon the achievement of agreed performance criteria. The ultimate value of the options (if any) are accordingly dependent upon future share price movements. As at 31 March 2007 none of the options for which share-based payment charges have been incurred have been exercised. The cost of equity settled transactions is recognised, together with a corresponding increase in reserves, over the period in which the performance conditions are fulfilled, ending on the date on which the share option vests. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except where forfeiture is solely due to share prices not achieving the vesting threshold. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in computation of diluted earnings per share. 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% 24 ANNUAL REPORT 2007 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 is the amount receivable by the Group for goods supplied and services rendered excluding VAT. Turnover principally arises from retail sales and provision of ferry services, but also includes hotel takings, insurance commissions, revenues billed for shipping agency activities and port services, in the Falkland Islands. Turnover from the sale of goods is recognised at the point of sale or despatch, whilst that of the ferry and other services is recognised when the service is provided. Pensions The Group operates two defined contribution pension schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The amount charged to profit and loss represents the contributions payable to the schemes in respect to the accounting period. The Group also administers two pension schemes providing benefits based on final pensionable pay, one of which is unfunded. The assets of the PHFC scheme 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 to which it is recoverable) or deficit is recognised in full. The movement in the scheme surplus/defecit 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. FALKLAND ISLANDS HOLDINGS PLC 25 1 Accounting policies CONTINUED 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. Classification of financial instruments issued by the Group 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. 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. 26 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 2 Segmental information The table sets out information for both of the Group’s industry segments and geographic areas of operation. Turnover – continuing operations Discontinued operations – Cobham Travel Total turnover Net assets Segment operating profit Profit on sale of fixed asset investments Profit on sale of discontinued operations Net interest expense Group profit before tax Underlying profit before tax: Group profit before tax Goodwill amortisation Exceptional costs Profit on sale of fixed asset investments Profit on sale of discontinued operations General trading Ferry Services (Falklands) (Portsmouth) £’000 £’000 2007 Total £’000 General trading Ferry Services (Falklands) (Portsmouth) £’000 £’000 2006 Total £’000 12,256 3,362 15,618 11,902 3,307 15,209 – 12,256 9,998 1,122 485 – (115) 1,492 1,492 – 105 (485) – – 3,362 4,138 388 – – 15,618 11,902 14,136 1,510 3,911 637 527 3,834 8,941 426 527 15,736 12,852 1,063 – – (40) 348 348 204 – – – 485 2,135 – 2,135 – (155) – (212) 1,840 2,560 1,840 204 105 2,560 – 435 84 (52) 458 458 204 52 84 (264) 3,018 3,018 204 487 (485) (2,135) – (2,135) – – 860 (84) 630 (84) 1,490 Underlying profit before tax 1,112 552 1,664 Underlying profit before tax is presented to illustrate the Group’s profit before tax, goodwill amortisation, exceptional items and profit on the sale of fixed asset investments and discontinued operations. 3 Analysis of continuing and discontinued operations No activities were discontinued in the year. Turnover Cost of sales Gross profit Administrative expenses Other operating income Operating profit 2007 As restated As restated As restated Continuing 2006 2006 Total £’000 Continuing Discontinued £’000 £’000 15,618 (9,531) 15,209 (9,384) 6,087 5,825 527 (471) 56 2006 Total £’000 15,736 (9,855) 5,881 (4,915) (5,104) (58) (5,162) 338 1,510 341 1,062 3 1 344 1,063 4 Exceptional costs Pension scheme restructuring (see note 20): Crystalisation of past service cost Curtailment gain Compensation for loss of office Impairment of fixed assets (Upland Goose Hotel) Exceptional costs 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 holding company audit services – for subsidiary companies audit services – for other services Operating lease rental – vehicles – other leases and after earning: Other operating income FALKLAND ISLANDS HOLDINGS PLC 27 2007 £’000 197 (92) – – 105 2007 £’000 468 204 19 38 20 – 31 2006 £’000 – – 105 382 487 2006 £’000 838 204 18 36 22 3 31 338 344 Of the fees paid to the auditor for other services £20,000 (2006: £22,000) relates to general advisory and tax work. Other operating income is mainly comprised of property rentals and financial services income. 6 Interest expense Interest receivable Interest payable on bank loans Net bank interest payable Expected return on pension scheme assets Interest cost on pension scheme liabilities Net financing cost of pension schemes 2007 £’000 205 (236) (31) 13 (137) (124) 2006 £’000 38 (194) (156) 9 (117) (108) 28 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 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 with respect to prior periods Total current tax Deferred taxation Changes in recoverable amount (Decrease) / increase in deferred tax liability before deferred tax on pensions (see note 19) Deferred taxation on pension liability movement Tax on profit on ordinary activities 2007 £’000 421 (291) 130 414 (13) 531 (71) (38) (109) (28) 394 2006 £’000 228 (114) 114 203 58 375 8 – 8 (9) 374 The current tax charge is higher than the standard rate of corporation tax in the United Kingdom of 30%. The difference can be explained below: Profit on ordinary activities before tax: Current tax at 30% Expenses not deductible for tax purposes Capital allowances less / (greater than) depreciation 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 dividends paid in the financial year 2007 £’000 As restated 2006 £’000 1,840 3,018 552 8 32 (84) 66 (4) (2) (24) (13) 531 2007 £’000 545 545 905 62 (33) (579) (20) 2 (3) (17) 58 375 2006 £’000 502 502 The Directors have proposed a dividend of £592,769 (7.0p per share). In accordance with the provisions of FRS21 ‘Events after the balance sheet date’ this has not been included within creditors as it was not approved at the year-end. FALKLAND ISLANDS HOLDINGS PLC 29 9 Earnings per share The calculation of basic earnings per share is based on profits on ordinary activities after taxation, and the weighted average number of shares in issue in the period, excluding shares held under the Employee Share Option Ownership Plan (‘ESOP’) (see note 22). The calculation of diluted earnings per share is based on profits on ordinary activities after taxation, and the weighted average number of shares in issue in the period, excluding shares held under ESOP, adjusted to assume the full issue of share options in issue, to the extent that they are dilutive. Profit on ordinary activities after taxation The profits above form the basis of calculating the basic and diluted earnings per share. Weighted average number of shares in issue Less: shares held under ESOP Average number of shares in issue excluding ESOP Maximum dilution with regard to share options Diluted weighted average number of ordinary shares Basic earnings per share Diluted earnings per share 2007 £’000 As restated 2006 £’000 1,446 2,644 2007 Number As restated 2006 Number 8,466,060 8,380,066 (48,917) (55,417) 8,417,143 8,324,649 30,927 109,736 8,448,070 8,434,385 2007 2006 17.2p 17.1p 31.8p 31.3p To provide a comparison of earnings per share based on underlying performance, the calculation below sets out basic and diluted earnings per share based on profits before amortisation of goodwill and exceptional items. Earnings per share on underlying profitability Underlying profit before tax (see note 2) Less: tax thereon Underlying profit after tax 2007 £’000 1,664 (532) 1,132 2006 £’000 1,490 (477) 1,013 Underlying performance basic earnings per share Underlying performance diluted earnings per share Increase 2007 2006 9.8% 11.7% 13.4p 13.4p 12.2p 12.0p 30 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 10 Employment costs including Directors Wages and salaries Social security costs Other pension costs Employment costs 2007 £’000 3,255 172 145 3,572 2006 £’000 3,228 210 156 3,594 Details of Directors’ remuneration are provided the Directors’ Report, under the heading ‘Details of Directors’ Remuneration and Emoluments’ on page 14. The average number of people employed in the year by location: Falkland Islands England Average number employed 11 Intangible assets Cost: At 31 April 2006 and 31 March 2007 Accumulated amortisation: At 1 April 2006 Charge for the year At 31 March 2007 Net book value: Balance at 31 March 2006 Balance at 31 March 2007 2007 Number 2006 Number 86 48 134 92 50 142 Goodwill £’000 4,248 269 204 473 3,979 3,775 FALKLAND ISLANDS HOLDINGS PLC 31 Freehold land and buildings £’000 Long leasehold land and buildings £’000 Vehicles, plant and equipment £’000 Ships £’000 Total £’000 4,881 342 3,289 2,828 11,340 97 – – – 28 – 157 – 282 – 4,978 342 3,317 2,985 11,622 1,350 114 – 1,464 3,531 3,514 50 7 – 57 292 285 130 132 – 262 3,159 3,055 1,768 215 – 1,983 1,060 1,002 12 Tangible fixed assets of the Group Cost: At 1 April 2006 Additions Disposals At 31 March 2007 Accumulated depreciation: At 1 April 2006 Charge for the year Disposals At 31 March 2007 Net book value: At 31 March 2006 At 31 March 2007 Included within freehold land and buildings is land stated at £948,000 (2006: £948,000) which is not depreciated. The Company has no tangible fixed assets. 13 Fixed asset investments Cost: As at 1 April 2006 Disposals in the year As at 31 March 2007 Group and Company FGML FOGL investment investment £’000 £’000 190 (190) – 2,420 – 2,420 The investments are shown at cost at the balance sheet date. On 12 January 2007 the Company disposed of its investment in Falkand Gold and Minerals Limited by selling its entire holding of 11,250,000 shares with a cost of £190,000 for £675,000 resulting in a profit on disposal of £485,000. 3,298 468 – 3,766 8,042 7,856 Total £’000 2,610 (190) 2,420 32 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 13 Fixed asset investments CONTINUED Market value and shareholdings: FOGL FGML Market value at 31 March Group and Company 2007 £’000 12,977 – 12,977 2006 £’000 21,500 1,800 23,300 At the year end the Group held 15,000,000 ordinary shares in Falkland Oil and Gas Limited representing a 16.3% interest (2006: 15 million shares). The closing market price of FOGL at 31 March 2007 was 86.5p (2006: 143.5p). Company investment in Group undertakings: As at 1 April 2006 and 31 March 2007 £’000 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 Company Limited Ordinary shares of £1 100% General trading in the Falkland Islands Preference shares of £10 The Falkland Islands Ordinary shares of £1 100% Trading Company Limited Darwin Shipping Limited Ordinary shares of £1 100% indirect The Portsmouth Harbour Ordinary shares of £1 100% 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 Arranging the purchase and shipment of goods to the Falkland Islands Shipping services between the United Kingdom and the Falkland Islands Ferry services in the United Kingdom Statutory harbour authority Marine and engineering maintenance Passenger ferry operator All of the above are incorporated in England and Wales except for Darwin Shipping Limited, which is incorporated in the Falkland Islands. FALKLAND ISLANDS HOLDINGS PLC 33 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 Total debtors Group 2007 £’000 2006 £’000 2,678 3,107 Group Company 2007 £’000 2006 £’000 2,099 1,085 – 133 – 124 161 – 96 46 376 186 2,517 1,789 45 2,562 48 1,837 2007 £’000 – 205 – 1 16 – 222 – 222 2006 £’000 – 93 – 219 21 – 333 – 333 The cost of assets acquired for the purpose of letting under hire purchase agreements by the Group during the period amounted to £186,000 (2006: £103,000). The aggregate rentals receivable during the period in respect of hire purchase agreements were £182,000 (2006: £193,000). 16 Creditors: amounts falling due within one year Group Company Bank loans and overdrafts (see note 18) Trade creditors Other creditors including taxation and social security Corporation tax Accruals and deferred income Unsecured loan notes 2007 £’000 499 3,181 260 570 757 43 2006 £’000 499 2,640 244 424 947 43 Creditors due within one year 5,310 4,797 2007 £’000 300 – 24 – 274 43 641 2006 £’000 300 – 153 – 285 43 781 Within other creditors is tax and social security of £39,521 (2006: £46,188). 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. 34 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 17 Creditors: amounts falling due after more than one year Group Company 2007 £’000 2,191 – 2,191 2006 £’000 2,723 42 2,765 2007 £’000 757 – 757 2006 £’000 1,090 42 1,132 Bank loans Unsecured loan notes Creditors due after more than one year 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 Net funds / (debt) Group Company 2007 £’000 2006 £’000 2007 £’000 2006 £’000 (542) (499) (1,054) (638) (2,733) 4,959 2,226 (542) (542) (1,590) (634) (3,308) 3,601 293 (342) (200) (215) – (757) 2,786 2,029 (342) (342) (790) – (1,474) 1,055 (419) 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 £2.0 million. Cash comprises: Short term money markets Cash held in sterling accounts Cash held in foreign currency accounts Total cash Interest rate risk Group 2006 £’000 3,470 70 61 3,601 2007 £’000 4,555 796 48 5,399 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 has a loan of £1.9 million in respect of the ferry delivered in 2005. 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 2007 the fair values of both of these instruments was a liability of £1,109. Interest on the unsecured loan notes accrued at 5% and interest is payable half yearly in April and October. The Group actively manages its cash resources and funds are placed on deposit with HSBC, attracting interest at a premium to the base rate. 19 Provisions for liabilities Deferred taxation: At 1 April Transfer to profit and loss account Fair value adjustment As at 31 March FALKLAND ISLANDS HOLDINGS PLC 35 As restated accelerated capital allowances 2006 £’000 882 8 (37) 853 2007 £’000 853 (109) – 744 On 6 April 2008 the standard rate of UK corporation tax will be reduced by 2% from 30% to 28%. 20 Pension schemes The Group operates two defined contribution and also two defined benefit pension schemes. Both defined benefit schemes have been closed to new members and future accrual. Defined contribution schemes The pension cost charge for the period for the defined contribution scheme represents contributions payable by the Group and amounted to £145,000 (2006: £138,000). The Group anticipates paying contributions amounting to £150,000 during the year ending 31 March 2008. There were no outstanding or prepaid contributions at either the beginning or end of the financial year. Defined benefit pension schemes (i) 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 schemes’ deficit 2007 £’000 (2,136) (381) (2,517) 648 (1,869) 2006 £’000 (2,107) (471) (2,578) 669 (1,909) (ii) 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. This scheme was closed to further accrual on 31 March 2007. Benefits are payable on retirement at the normal retirement age. The latest full actuarial valuation was carried out at 31 March 2005 and was updated for FRS 17 purposes to 31 March 2007 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 2007 2006 2005 2.6% 3.0% 5.4% 3.2% 4.0% 3.0% 5.0% 3.0% 4.0% 3.0% 5.4% 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. 36 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 20 Pension schemes CONTINUED (ii) The Falkland Islands Company Limited Scheme CONTINUED 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 Movement in deficit during the year: Deficit in scheme at beginning of the year Current service cost Past Service cost Curtailment gain Pensions paid Other finance cost Actuarial gain Value at 2007 £’000 (2,136) 534 (1,602) Value at 2006 £’000 (2,107) 527 (1,580) 2007 £’000 (2,107) (28) (197) 91 93 (106) 118 Value at 2005 £’000 (2,141) 696 (1,445) 2006 £’000 (2,141) (19) – – 92 (96) 57 Deficit in the scheme at the end of the year (2,136) (2,107) Analysis of other pension costs charged in arriving at operating profit: Current service cost Analysis of amounts included in other finance costs: Interest on pension scheme liabilities Analysis of amount recognised in statement of total recognised gains and losses: Experience (losses) / gains arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial gain recognised in statement of total recognised gains and losses 2007 £’000 28 2007 £’000 106 2007 £’000 (3) 121 118 2006 £’000 19 2006 £’000 96 2006 £’000 80 (23) 57 FALKLAND ISLANDS HOLDINGS PLC 37 20 Pension schemes CONTINUED (ii) The Falkland Islands Company Limited Scheme CONTINUED Scheme liabilities CONTINUED History of experience gains and losses: 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 2007 2006 2005 2004 2003 (3) 80 0.14% 3.7% Unavailable as the Group only adopted FRS 17 on 1 April 2005. 121 (23) (51) 49 25 (5.7)% (1.1)% (2.3)% 2.3% 1.7% (iii) Portsmouth Harbour Ferry Company Plc (1975) Retirement Fund 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 2007, 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 2007 2006 2005 3.2% 5.4% 3.2% 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. 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 Value at 2007 £’000 156 20 34 210 (591) (381) 114 (267) Value at 2006 £’000 133 17 6 156 (627) (471) 142 (329) Value at 2006 £’000 91 34 – 125 (415) (290) 87 (203) 38 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 20 Pension schemes CONTINUED (iii) Portsmouth Harbour Ferry Company Plc (1975) Retirement Fund CONTINUED Scheme assets CONTINUED 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 Fair value adjustment Contributions paid Other finance costs Actuarial gain / (loss) Deficit in the scheme at the end of the year Analysis of amounts included in other finance costs: Expected return on pension scheme assets Interest on pension scheme liabilities Other finance costs 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 Long term Long term rate of return 2007 7.5% 5.0% 4.5% 2007 £’000 (471) – 47 (18) 61 (381) 2007 £’000 13 (31) (18) 2007 £’000 (4) – 65 61 rate of return 2006 7.5% 5.0% 4.5% 2006 £’000 (290) (84) 3 (12) (88) (471) 2006 £’000 9 (21) (12) 2006 £’000 19 (72) (35) (88) FALKLAND ISLANDS HOLDINGS PLC 39 20 Pension schemes CONTINUED (iii) Portsmouth Harbour Ferry Company Plc (1975) Retirement Fund CONTINUED Scheme assets CONTINUED 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 21 Called up share capital 2007 2006 2005 2004 2003 (4) 1.0% 19 12.2% Unavailable as the Group only adopted FRS 17 on 1 April 2005. – – (72) (15.2)% 61 (88) (17.1)% (18.7)% Authorised: 12,500,000 (2006: 12,500,000) ordinary shares of 10p each 1,250 1,250 Allotted, called up and fully paid: 8,470,210 (2006: 8,381,238) ordinary shares of 10p each 847 838 Group and Company 2007 £’000 2006 £’000 A total of 418,209 (2006: 303,103) 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 ‘Directors’ interests in shares’ on pages 14 and 15. There were no (2006: 81,972) share options outstanding under the Company’s Saving Related Share Option Scheme at 31 March 2007. 40 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 22 Reserves (i) Group At 1 April 2006 Prior year adjustment – FRS 20 At 1 April 2006 as restated Retained profit for the year Charge for share-based payments Dividends Premium on shares issued in the year, net of expenses Actuarial gain on pension net of tax As at 31 March 2007 Share premium account £’000 7,064 – 7,064 – – – 142 – 7,206 Other reserves £’000 703 – 703 – – – – – Revenue reserves £’000 4,247 (95) 4,152 1,446 – (545) – 131 Share options reserve £’000 – 95 95 – 101 – – – Total revenue reserves £’000 Total £’000 4,247 12,014 – 4,247 1,446 101 (545) – 131 – 12,014 1,446 101 (545) 142 131 703 5,184 196 5,380 13,289 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 2007 the plan held 48,917 (2006: 55,417) ordinary shares at cost of £73,265 (2006: £83,000). The market value of the shares at 31 March 2007 was £117,400 (2006: 198,116). Options described in the Directors’ report over these shares are exerciseable at prices of 139.5p, 150p, 317.5p and 520p from 2003 to 2011. Shares held in the ESOP have had their rights to dividends waived, as in prior years. (ii) Company At 1 April 2006 Prior year adjustment – FRS 20 At 1 April 2006 as restated Retained profit for the year Charge for share-based payments Dividends Premium on shares issued in the year, net of expenses As at 31 March 2007 Share premium account £’000 7,064 – 7,064 – – – 142 7,206 Other reserves £’000 5,389 – 5,389 – – – – Revenue reserves £’000 3,838 (95) 3,743 2,238 – (545) – Share options reserve £’000 – 95 95 – 101 – – Total revenue reserves £’000 Total £’000 3,838 16,291 – 3,838 2,238 101 (545) – 16,291 2,238 101 (545) – 142 5,389 5,436 196 5,632 18,227 A profit of £2,238,000 (2006 as restated: £2,663,000) 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. FALKLAND ISLANDS HOLDINGS PLC 41 23 Share Options The Company adopted FRS 20 ‘Share-based payments’ for the first time during the year. The share options reserve is used to record the costs arising under FRS 20 for options issued to Directors and senior employees, and similar costs associated with share-based payments. Opening balance Costs associated with share options As at 31 March Group and Company 2007 £’000 95 101 196 2006 £’000 25 70 95 The following options have been valued for FRS 20 purposes: Date of issue 1 April 2003 10 February 2005 14 June 2005 14 June 2005 13 July 2006 Exercise Share price Price at grant date Fair Value per Share Number 81,972 57,962 63,528 67,500 103,189 £ 1.70 5.20 4.25 4.25 3.18 £ 1.75 5.20 4.25 4.25 3.18 £ 0.31 1.40 1.12 1.66 0.64 Fair Value Total £ Earliest Exercise Date Expiry Date 25,411 31 Mar 06 1 Oct 06 81,147 10 Feb 08 9 Feb 15 71,151 14 Jun 08 13 Jun 15 112,050 14 Jun 08 13 Jun 15 66,041 13 Jul 09 12 Jul 16 The fair values of the options are estimated at the date of grant using appropriate option pricing models and are charged to the profit and loss account over the expected life of the options. The following table gives the assumptions made in determining the fair value of the options subject to the provisions of FRS 20 currently in issue. Expected volatility is determined by reference to past performance of the Company’s share price. Expected volatility Risk-free interest rate Expected life of options (years) Dividend yield Share price at grant date EPS Share price conditions attached conditions attached 1 April 03 10 Feb 05 14 June 05 14 June 05 13 July 06 22% 3.1% 3.25 2.8% £1.82 37% 4.4% 6.5 1.1% £5.20 38% 4.3% 6.5 1.4% £4.25 38% 4.3% 6.5 1.4% £4.25 31% 4.7% 6.5 2.1% £3.18 During the year ended 31 March 2007, 38,500 options were exercised over ordinary shares. Options issued prior to 6 November 2002 are not subject to the provisions of FRS 20. 42 ANNUAL REPORT 2007 Notes to the Financial Statements CONTINUED 23 Share Options CONTINUED Movement in options in issue (including options issued prior to 6 November 2002 and outside the scope of FRS 20). Pre-6 Nov 02 1 Apr 03 10 Feb 05 14 June 05 14 June 05 13 July 06 Number Number Number Number Number Number Group and Company As at 1 April 2005 157,800 81,972 57,692 – – Granted during the period Exercised during the period Expired during the period – – – – – – – – – 63,528 109,500 – – – (15,000) As at 1 April 2006 157,800 81,972 57,692 63,528 94,500 – – – – – Total Number 297,464 173,028 – (15,000) 455,492 Granted during the period – – Exercised during the period (11,500) (81,972) Expired during the the period As at 31 March 2007 – 146,300 _ – – – – – – – – – (27,000) 103,189 103,189 – – (93,472) (27,000) 57,692 63,528 67,500 103,189 438,209 24 Reconciliation of movement in shareholders’ funds Opening shareholders’ funds Profit for the financial year Dividends Other recognised gains and losses Share options charge for the year Issue of shares As at 31 March Group Company 2007 £’000 12,852 1,446 (545) 273 101 9 2006 £’000 10,791 2,714 (502) (154) – 3 2007 £’000 17,129 2,238 (545) 142 101 9 2006 £’000 14,895 2,733 (502) – – 3 14,136 12,852 19,074 17,129 FALKLAND ISLANDS HOLDINGS PLC 43 25 Operating lease commitments Annual commitments under non-cancellable operating leases are as follows: Operating leases which expire: Within one year In the second to fifth years inclusive Over five years Group 2007 2006 Land and buildings £’000 Other operating leases £’000 7 – – 7 – – – – Land and buildings £’000 – 30 – 30 Other operating leases £’000 3 – – 3 The Company had no operating lease commitments. 26 Capital commitments At the year end the Group had no capital commitments not provided in these financial statements. 44 ANNUAL REPORT 2007 Directors and Corporate Information Directors David Hudd Chairman Registered Office Charringtons House, John Foster Managing Director The Causeway, Bishop’s Stortford, Hertfordshire CM23 2ER Telephone: 01279 461630 Fax: 01279 461631 Email: admin@fihplc.com Registered number 03416346 Website: www.fihplc.com Auditor KPMG Audit Plc St Nicholas House, Park Row, Nottingham NG1 6FQ Nominated Adviser Dawnay Day Corporate Finance Limited 17 Grosvenor Gardens, London SW1W 0BD Financial PR College Hill 78 Cannon Street, London EC4N 6NN Leonard Licht* Sir Harry Solomon* Mike Killingley* *Non-executive Directors Company Secretary James Ivins Corporate Information Stockbroker KBC Peel Hunt 111 Old Broad Street, London EC2N 1PH Solicitors Bircham Bell and Dyson LLP 50 Broadway, Westminster, London SW1H 0BL Banker HSBC Bank plc 18 North Street, Bishop’s Stortford, Hertfordshire CM23 2LP Registrar Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU Senior Staff in the Falkland Islands Senior Staff at Portsmouth Harbour Ferry Company Roger Spink Director and General Manager Paul Fuller Director and General Manager David Castle Retailing Director Rhett Gibson Senior Skipper Ana Crowie Financial Controller Christine Waters Financial Controller Telephone: 00 500 27600 Email: fic@horizon.co.uk Telephone: 023 9252 4551 Email: admin@gosportferry.co.uk Website: www.the-falkland-islands-co.com Website: www.gosportferry.co.uk www.fihplc.com