FIH Group Plc
Annual Report 2010

Plain-text annual report

Falkland Islands Holdings plc Annual Report 2010 Contents 1 Financial Highlights 2 Chairman’s Statement 4 Managing Director’s Business Review 14 Board of Directors and Secretary 15 Directors’ Report 20 Independent Auditor’s Report 21 Consolidated Income Statement 22 Consolidated Statement of Comprehensive Income 23 Consolidated Balance Sheet 24 Company Balance Sheet 25 Consolidated Cash Flow Statement 26 Company Cash Flow Statement 27 Consolidated Statement of Changes in Shareholders’ Equity 27 Company Statement of Changes in Shareholders’ Equity 28 Notes to the Financial Statements 72 Directors and Corporate Information FALKLAND ISLANDS HOLDINGS PLC 1 Financial Highlights FOR THE YEAR ENDED 31 MARCH 2010 Turnover from continuing operations Profit / (loss) before tax Underlying profit before tax* Diluted earnings per share before amortisation and non-trading items Dividend per share Cash flow from operations Net asset value per share *Defined as profit before tax, amortisation and non-trading items. 2010 £m 29.22 5.67 2.69 21.7p 9.0p 2.35 376p 2009 £m Change % 32.25 (0.63) 2.31 18.8p 8.0p 4.10 276p (9.4) – 16.5 15.4 12.5 (42.7) 36.2 Turnover (£m) from continuing operations 32.25 29.22 15.21 15.62 17.21 Underlying profit before tax* (£m) 2.69 2.31 2.01 1.65 1.49 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Diluted earnings per share (pence) before amortisation and non-trading items 21.7 18.8 17.1 13.9 12.0 Dividend per share (pence) 9.00 8.00 8.00 7.00 6.50 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2 ANNUAL REPORT 2010 Chairman’s Statement FOGL stake In November 2009, in order to strengthen the Group’s financial position and to reduce its risk profile, 3 million shares in FOGL were sold, (20% of the holding) generating proceeds of £3.6 million and a profit after tax of £3.1 million. The Group now holds 12 million FOGL shares, which represents 8.2% of the issued share capital. As at 31 March 2010, the market value of this shareholding was £15.5 million (129.5p per FOGL share) compared with £10.9 million as at 31 March 2009 (15 million FOGL shares at 73p per share). The Board have publicly stated that no further FOGL shares will be sold in advance of the drilling of FOGL’s Toroa prospect, which was spudded on 31 May 2010 and is expected to take 35 days to complete. A further commitment well will be drilled on one of FOGL’s other three surveyed prospects. These are all in water depths of more than 1,000 metres and efforts are continuing to secure a rig which is capable of drilling at such depths. It is your Board’s intention to retain a very substantial holding in FOGL while the exploration programme continues. Net assets Following the FOGL share sale and after capital expenditure of £1.4 million (2009: £1.0 million), the Groups borrowings have been reduced to £5.3 million (2009: £7.2 million). Cash balances at the year end amounted to £3.8 million (2009: £3.0 million) resulting in net borrowings at the end of £1.5 million (2009: £4.2 million). Thus we now have scope for further investment in our businesses. Net assets per share including intangibles were 376p at 31 March 2010 (2009: 276p). Outlook Current economic conditions do not allow much forward visibility. However in the year to date, the Group’s overall trading performance is in line with our expectations. In the Falklands, oil exploration will continue to boost local demand. However, another confidence and disappointing illex squid catch (which impacts the first quarter’s trading), increases in freight costs and reduced numbers of cruise passengers will negatively impact performance. David Hudd Chairman I am pleased to report that the year ended 31 March 2010 has been a successful year for the Group with significant growth in underlying profits, earnings per share and a substantial increase in the proposed dividend. The sale of 20% of the Group’s shareholding in Falkland Oil and Gas (“FOGL”) greatly strengthened its financial position such that whatever the results of oil exploration in the Falklands, the Group should be able to deliver strong cash flow, earnings and dividends. Results Underlying profits before tax, (excluding amortisation / impairment of intangibles and non trading items), increased by 17% to £2.7 million (2009: £2.3 million). After non- recurring credits of £3.3 million largely representing the profit on the sale of FOGL shares, the Group achieved pre tax profit of £5.7 million (2009: loss of £0.6 million). Underlying earnings per share increased by 16% to 22.0p (2009: 19.0p). Reported earnings per share were 57.5p (2009: loss of 12.8p). Dividends The Board is pleased to recommend a final dividend of 5p per share which, together with the Group’s inaugural interim dividend of 4p per share, makes a total dividend for the year of 9p per share, an increase of 12.5% (2009: 8p per share). Overview of operations The Group’s three trading businesses performed well in difficult market conditions with operating profits from the Falklands and Momart both increasing by some 10% and the Portsmouth Harbour Ferry (“PHFC”) just ahead of the prior year. Trading in the Falklands improved in the second half of the year with the benefit of the expanded West Store and business generated by the oil exploration programme. Momart’s performance improved in the second half as the commercial art market showed signs of recovery while at PHFC profits were maintained on reduced passenger numbers. FALKLAND ISLANDS HOLDINGS PLC 3 At Momart, although the commercial gallery market is improving, spending cuts are reducing the number of exhibitions staged by State funded institutions. Whilst we do not expect to see significant improvements in trading conditions in the coming year, Momart remains the market leader and is well placed for any upturn in the art market. At PHFC, we continue to make progress with the Borough Council towards a new pontoon in Gosport and are in the process of agreeing a long term lease for its use, with planned installation towards the end of our financial year. The economic background in Gosport is such that it is difficult to envisage any improvement in PHFC’s passenger numbers. The Group’s diversity continues to provide a strong foundation and whilst trading conditions remain challenging, all of the businesses are financially and operationally stable, with solid, market leading positions. Despite our caution for the coming year, we anticipate continued robust cash flow and are confident of our ability to maintain dividends. It is likely that the current trading performance of the Group will continue to be overshadowed by news of the oil exploration being undertaken in the Falklands, the main economic benefits of which have yet to be felt. However, we are currently examining the development opportunities in the Islands which will result from a successful oil outcome. In service businesses such as ours, staff are our biggest asset and the Board would like to thank all our colleagues for their continued hard work and commitment. David Hudd Chairman 23 June 2010 4 ANNUAL REPORT 2010 Managing Director’s Business Review John Foster Managing Director Overview I am pleased to report that, despite the challenging economic environment, the Group performed well in the year to 31 March 2010. Trading in the second half was generally stronger than in the first half, particularly in the Falkland Islands as a result of the oil exploration activity, and this, together with the substantial profit from the sale of three million FOGL shares in November 2009, helped lift the Group’s profitability for the year. Group trading summary All of the Group’s operating businesses were impacted by the recession and, as a result, Group turnover decreased by 9.4% to £29.2 million (2009: £32.2 million). However, due to effective cost control, underlying operating profits (before amortisation / impairment of intangibles and non-trading items) rose by 7% to £3.1 million (2009: £2.9 million). With interest costs reduced at £0.40 million (2009: £0.91 million), underlying profits before tax (before amortisation / impairment of intangibles and non-trading items) increased by 17% to £2.7 million (2009: £2.3 million). All three of the Group’s operating businesses maintained or increased their profitability during the year. In addition, the Group benefited from significant non- trading income which added a further £3.3 million to overall profitability. The most significant element of this was the £3.1 million profit from the sale of FOGL shares, but there was also a £0.2 million receipt in respect of the agreed early surrender of a leasehold property. Reported profit before tax was £5.7 million (2009: loss £0.6 million). The Group pays corporation tax on its UK earnings at the standard rate of 28%, except for certain of its subsidiaries which qualify for the smaller companies rate of 21%. On its Falklands earnings, the Group pays tax at the rate 26%. There is no Capital Gains Tax on sales of shares, property or other qualifying assets in the Falkland Islands. For the year ended 31 March 2010 the Group’s effective tax rate on its underlying trading activities was 26% (2009: 26%). Fully diluted earnings per share derived from underlying profits, increased by 15.4% to 21.7p (2009: 18.8p). Strong cash flow allowed the Group to reduce its borrowings at 31 March 2010 to £5.3 million (31 March 2009: £7.2 million) even after total capital expenditure of £1.4 million (2009: £1.0 million). Cash balances at 31 March 2010 were £3.8 million (31 March 2009: £3.0 million) resulting in net borrowings at the year end of £1.5 million (2009: £4.2 million). Net assets per share increased sharply during the year to 376p per share at 31 March 2010 (2009: 276p per share) reflecting both the increase in realised profits and the uplift in the value of the Group’s holding in FOGL. Underlying pre-tax profit The Group’s underlying pre-tax profits (“PBTa”) showed steady growth with a £0.4 million increase over the prior year as shown below, rising 17% to a record level of £2.69 million. Underlying profit Year ended 31 March 2010 £m 2009 £m Underlying pre-tax profit 2.69 2.31 Add / (deduct) non-trading and exceptional Items Profit on the sale of FOGL shares Profit on the surrender of lease Revaluation of interest rate collar 3.09 0.25 0.04 – – (0.33) Amortisation of intangibles (0.40) (0.40) Impairment of goodwill Restructuring costs Profit / (loss) before tax as reported – – (1.98) (0.23) 5.67 (0.63) Note: Underlying profit before tax excludes the amortisation of intangible assets, any impairment of goodwill and non-trading items (profit on sale of shares, profits from the early surrender of a lease, restructuring costs and fair value movements on derivative financial instruments). Further details of these non-trading items are given below: Non-trading items Profit on sale of shares in Falkland Oil and Gas Limited – £3.09 million (2009: nil). On 30 November 2009 the Group reduced its stake in Falkland Oil and Gas Limited selling three million shares producing cash proceeds of £3.6 million and realising a profit of £3.1 million. FALKLAND ISLANDS HOLDINGS PLC 5 Profit on the early surrender of a property lease – £0.25 million (2009: nil). During the year the Group received compensation for the early vacation of leasehold premises by Momart, which had been the subject of litigation with the landlords. Revaluation of interest rate collar £0.04 million (2009: loss £0.33 million). In previous years the Group entered into two interest rate collars as a hedge against possible increases in interest rates. These instruments produced an effective floor on the bank base rate payable by the Group of 4.25% and led to increased interest rate costs in the first half of the year. In January 2010 these instruments were liquidated eliminating what had become onerous interest costs. This resulted in a small accounting gain of £0.04 million (2009: loss £0.33 million) and from January 2010 the Group has been able to take full advantage of current low rates. Finance costs The Group’s net financing costs fell sharply to £0.40 million (2009: £0.91 million). Excluding the non-cash impact of the collar revaluation which saw savings of £380,000, total finance costs fell by £132,000. Year ended 31 March Net financing costs as shown in Income Statement Made up of: 2010 £m 2009 (Increase) £m decrease (401) (912) 511 Pension finance costs net (132) (130) -2 Interest collar revaluation Notional interest on deferred consideration Amortisation of bank fees 45 (334) 379 (48) (104) 56 (30) (30) – Total non-cash items (165) (598) 433 Lease interest income 78 74 Net bank interest paid (314) (388) 4 74 Total net financing costs (401) (912) 511 As shown above, of the net financing costs of £0.4 million (2009: £0.9 million), net bank interest payable amounted to £314,000 (2009: £388,000) (see note 8 on page 40 for more details). Bank interest cover Year ended 31 March Underlying operating profit as above Net bank interest (payable) Bank interest cover 2010 £m 3.13 0.31 10.1x 2009 £m 2.89 0.39 7.4x Since the liquidation of the interest collar in January 2010 interest costs have fallen sharply. In the current financial year if bank Base Rates remain unchanged at 0.5% with total borrowings of £5.3 million the Group’s pro-forma bank interest charge with average rates of c. 3.5% for the year would be c. £0.19 million. Earnings per share Year ended 31 March Underlying profit as above 2010 £m 2009 £m Change % 2.69 2.31 16.4 Tax thereon (0.71) (0.60) -18.3 Underlying profit after tax 1.98 1.71 15.8 Diluted average number of shares in issue (’000s) 9,147 9,121 0.29 Diluted EPS 21.7p 18.8p 15.4 Review of operations A summary of Group revenue and operating profit by business is shown below: Revenue Year ended 31 March 2010 £m 2009 £m Change % Falklands 12.43 12.99 -4.3 Portsmouth Harbour Ferry 3.72 3.72 – Momart Total 13.07 15.54 -15.9 29.22 32.25 -9.4 Underlying operating profit Year ended 31 March Falklands Portsmouth Harbour Ferry Momart Total 2010 £m 1.38 0.79 0.96 3.13 2009 £m Change % 1.26 0.78 0.86 2.89 9.5 1.3 11.6 8.3 6 ANNUAL REPORT 2010 Managing Director’s Business Review CONTINUED Group revenue 2010 Momart 44% FIC 43% PHFC 13% 2009 2009 Momart 48% FIC 40% PHFC 12% Underlying operating profit 2010 Momart 31% FIC 43% PHFC 26% Momart 30% FIC 43% PHFC 27% Each of the Group’s businesses is reviewed in detail below: Falkland Islands Company (FIC) FIC reported a satisfactory out turn for the year with underlying operating profits for the year increasing by 9.5% to £1.38 million (2009: £1.26 million) despite a 4.3% fall in revenue. Year ended 31 March Revenues Retail Automotive Freight Property sales Other services 2010 £m 2009 £m Change % 8.08 1.43 0.99 0.36 1.57 8.01 1.95 0.80 0.27 1.96 0.1 -26.7 23.7 33.3 -19.4 Total FIC revenue 12.43 12.99 -4.3 Underlying FIC operating profit 1.38 1.26 9.5 Underlying operating profit margin (%) 11.1 9.7 14.4 The year started with a poor illex squid catch. This not only saw dramatic reductions in the level of support services required by the much reduced number of fishing boats and reefers, but it also resulted in significant reductions in government license revenues. This in turn had an impact on local spending and general confidence. In addition in April, FIC saw its principal retail competitor very substantially expand its supermarket on the outskirts of Stanley putting downward pressure on sales in the West Store. Automotive vehicle sales, particularly to fleet buyers, also fell sharply as organisational budgets were cut in response to the recession. However, in the second half there was a notable improvement in confidence in the Islands, due to a good loligo squid catch and the commencement of oil exploration activity. As anticipated, this stimulated demand across our retail activities and is likely to continue to have a further positive impact on the Falkland Islands economy. This positive momentum was further assisted by the start of a de-mining programme for which FIC was able to provide a range of services. FALKLAND ISLANDS HOLDINGS PLC 7 FIC revenues 2010 Property sales 3% Other Services 21% Automotive 12% Retail 64% 2009 Property sales 2% Other Services 21% Automotive 15% Retail 62% FIC’s automotive business saw a sharp fall in demand particularly for fleet vehicles for the military and their contractors. Total vehicle sales fell from 76 to 41, but vehicle rental income increased substantially as a result of the requirements of de-mining contractors BACTEC and the oil exploration companies. However, overall automotive revenues fell by 27% to £1.43 million. With the global recession continuing we do not anticipate any early recovery in military or corporate spending on vehicles. At Darwin Shipping, revenues from third party freight increased by 24% to just under £1 million as the business benefited from the delivery of a second shipment of wind turbines and also from increased freight linked to oil exploration activity. FIC’s Fishing Agency revenues fell by 43% as a result of the failure of the illex squid catch in April and May 2009. Penguin Travel, which has established itself as the on shore agent of cruise line operator Holland & America Lines, also had a more difficult year as unusually windy Rear entrance to the extended West Store. Whilst the competitive landscape for retailing in Stanley changed substantially in the year our new West Store extension has bolstered the performance of our core retailing activity and has confirmed the West Store’s position as the premier retailer in Stanley. Sales and margins came under pressure in the early months of the year due to the increased competition, but the team in Stanley led by new retail manager, Paul Lewis, responded well emphasising FIC’s offer to the customer of “Quality, Choice and Value”. At the half year, West Store sales were down by only 1% and in the second half with the November opening of the West Store extension and car park, sales increased by over 8% giving an overall increase for the year of 4.3%. The new extension increases retail selling space by 50% to over 15,000 sq ft which includes a new store providing household electrical goods. In FIC’s DIY businesses, Home Care and Home Living, demand was affected by the sluggish economy and continued pressure from local competitors. Overall sales in this segment which accounts for c. 15% of FIC’s retail revenues, decreased by 11% during the year. The Marmont Row development in Stanley. 8 ANNUAL REPORT 2010 Managing Director’s Business Review CONTINUED summer weather and the effects of the global recession led to a decline in passenger landings of 16%. This was the first decline in a decade. FIC’s Insurance broking operation increased both its revenues and its contribution in the year as did FIC’s Port Services (stevedoring) activities. The net return from FIC’s portfolio of 30 rental properties also saw a further steady increase as demand strengthened in the second half of the year. Further investment in our shops is planned for the forthcoming year, but margins will be negatively impacted by the recent increase in the cost of freight services, where costs saw sharp double digit increases with effect from 1 April 2010. During the year, work on Phase 1 of the conversion of the former Upland Goose Hotel into a terrace of nine residential properties was completed, now reverting to their former name of Marmont Row. With their location on the waterfront in central Stanley they represent a prime asset, which can be readily sold or rented depending on market conditions. Phase 2 involving the conversion of the final three units in the terrace is expected to be complete before the end of the calendar year. In the year, two older residential properties were sold realising a profit of over £350,000. This compares to the £240,000 generated from the sale of three similar properties in 2008/9. Our policy has been to dispose of older properties which require substantial modernisation and maintenance and reinvest the proceeds in new developments. The building, letting and selling of residential properties is one of FIC’s core activities and is expected to continue in the future particularly with the completion of Marmont Row which will increase FIC’s residential estate to over 40 units. Despite the reduction in revenues, FIC performed well helped by opportunities brought about by oil exploration and increased efficiency. For the year to 31 March 2010, underlying operating profits in the Falklands increased by over 9% to £1.38 million. Portsmouth Harbour Ferry Company (PHFC ) PHFC performed satisfactorily during the year posting a small increase in underlying operating profits despite flat revenues. Operating results Year ended 31 March Revenues Ferry fares Other revenue Total PHFC revenue Underlying PHFC operating profit Underlying operating profit margin (%) 2010 £m 2009 £m Change % 3.50 0.22 3.72 3.46 0.26 3.72 1.2 -15.4 – 0.79 0.78 1.3 21.0 21.0 – Passenger journeys (000s) 3,516 3,672 -4.2 Some 40% of ferry customers use the service for essential daily commuting. However, the service is not immune to the effects of recession and a significant reduction in discretionary journeys resulted in total passenger journeys declining by 4.2% compared to the previous year. As in the prior year, fares were increased on 1 June. The standard daily adult return fare rose by 4.5% to £2.30 and the price for a book of 10-trip tickets rose 5.5% to £9.50. These fare increases effectively offset the impact of the decline in passenger numbers and resulted in revenues from ferry fares rising 1.2% to £3.5 million. The core passenger ferry service accounted for 94% of revenue (2009: 93%). Other revenue is earned from PHFC’s programme of summer leisure cruises in the Solent area, which increased by £13,000 compared to the prior year and produced a small positive contribution. A small contract to provide water taxi services ended, as expected, in August 2009 after three years. Overheads were maintained at prior year levels despite increased hourly wage rates, and a steady rise in the price of fuel, due to tight cost control and a reduction in the level of overtime. After the allocation of head office costs, PHFC’s underlying operating profit increased by 1.3% to £0.79 million (2009: £0.78 million). FALKLAND ISLANDS HOLDINGS PLC 9 Momart Momart, increased profitability in the year despite the pressure on revenues in all areas of its business. Operating results Year ended 31 March Revenues Museums and Public Exhibitions Commercial Galleries Storage 2010 £m 2009 £m Change % 7.73 3.86 1.48 9.66 4.36 1.52 -20.0 -11.5 -2.6 Total Momart revenue 13.07 15.54 -15.9 Underlying Momart operating profit Underlying operating profit margin (%) 0.96 0.86 11.6 7.3 5.5 – Momart reacted quickly to a sharp contraction in the art market in the first quarter of the calendar year 2009, aligning its cost base with the reduced level of available business. Whilst first half revenue was significantly down on the record levels seen in the first half of 2008/9, much of the decline in sales came from a reduction in low margin work with overseas agents. Therefore, with lower overheads and increased efficiencies flowing from internal reorganisation, the Company remained consistently profitable throughout the year. Confidence in the commercial art market quickly recovered as world markets stabilised. Gallery Services We have seen a recovery in the commercial art market during the year, confirmed by the success of the Basel art fair in June and the Frieze fair in London in October. In the commercial Gallery Services (GS) division the Company was actively involved in a number of high profile overseas exhibitions of Damien Hirst’s work. Increased efforts were also made to win smaller contracts from commercial clients and streamlining its customs clearance procedures gave it an important competitive edge in winning international business. GS revenues also saw some recovery as confidence increased throughout the year and activity levels rose by 16% in the second half, compared to the first half. Overall revenues in GS were down 11.5% compared to 2008/9 and the division accounted for 30% of Momart’s total revenues (2008/9: 28%). Spirit of Gosport with the Spinnaker Tower in the background. Negotiations with Gosport Borough Council to replace the existing pontoon at Gosport are nearing completion with a modern replacement scheduled to be delivered in late 2010. The Council has agreed in principle to finance the new pontoon but its economic cost will be borne by PHFC and, ultimately, by passengers as fares will have to be increased to offset this increase in annual rent. Even after the necessary fare increases, the Board believes that the absolute cost for ferry users will remain modest and will still offer excellent value for money compared to alternative modes of transport. In 2009/10 the ferry service was able to improve on its exceptional record of reliability and over 99.9% of all 72,000 ferry trips (operating 364 days per annum) departed on time with only 76 sailings delayed or cancelled compared to 132 in the prior year and of these 22 were due to incidents beyond the Company’s control. Both the safety record and the reliability of this essential service rest upon the exceptional commitment and expertise of ferry staff who are proud to be a part of the community they serve. For the forthcoming year, we anticipate tough trading in annual conditions with further small declines passenger numbers and increased pressure on costs as fuel prices increase. 10 ANNUAL REPORT 2010 Managing Director’s Business Review CONTINUED Momart revenues 2010 Storage 11% Commercial Galleries 30% Museums and Public Galleries 59% 2009 Storage 10% Commercial Galleries 28% Museums and Public Galleries 62% Exhibitions In the Exhibitions division that serves leading museums in the UK and overseas, activity reduced sharply in the early part of the year (again compared to the record levels seen Momart was the contracted transport and logistics agency for The Real Van Gogh exhibition at the Royal Academy. in 2008/9) with notably less work coming from overseas institutions as their reduced budgets saw spending cut back on more expensive internationally sourced shows. In the UK Momart remained very active and maintained its market share. Notable installations included: the Baroque exhibition at the Victoria and Albert Museum, Anish Kapoor at the Royal Academy and the highly successful The Real Van Gogh exhibition in January 2010. Exhibition revenues remained 20% below the prior year albeit absolute revenues in creased marginally in H2 helped by the blockbusting Van Gogh exhibition at the Royal Academy. Overall revenues from Exhibitions fell in the year to £7.73 million (2009: £9.66 million) and the division accounted for 59% of Momart’s total revenues (2009: 62%). Storage Storage revenue was also affected by the downturn and prices came under pressure as storage customers sought to reduce costs and competition increased. Nonetheless Storage revenue remained the most stable income stream with a small decline of just 2.6% year on year to £1.48 million. Storage accounted for 11% of revenue in the year (2009: 10%). With less currency volatility, Momart also saw reduced exchange losses during the year. We believe that the recovery seen in the commercial art market is likely to track wider economic trends as reflected in the performance of global equity markets, but in Momart’s main market we see continued pressure on budgets for museum exhibitions both in the UK and overseas. FOGL stake Details of the FOGL stake are set out below: Year ended 31 March 2010 2009 Number of shares held 12,000,000 15,000,000 FOGL share price 129.5p 72.6p Market value of holding £15.5m £10.9m Cost £2.0m £2.5m In the year ended 31 March 2010 the share price of FOGL varied between a high of 177p and low of 63p. The sale of 3 million shares took place on 30 November 2009 at a price of 120p per share which produced a profit on sale of £3.1 million. Following the sale, the Group shareholding FALKLAND ISLANDS HOLDINGS PLC 11 represented 8.2% of FOGL’s enlarged share capital. Under IFRS, the investment is shown at market value. Balance sheet The Group’s Balance Sheet remains strong and as at 31 March 2010 had net assets of £34.2 million (2009: £24.9 million), borrowings of £5.3 million (2009: £7.2 million) and cash balances of £3.8 million (2009: £3.0 million). The carrying value of intangible assets was reduced by normal annual amortisation charges of £0.4 million to £13.5 million as at 31 March 2010 (2009: £13.9 million) (see note 11 page 43). The net book value of property, plant and equipment increased by £0.5 million to £7.5 million in the year to 31 March 2010. Fixed asset additions totalled £1.4 million while the depreciation charge for the year amounted to £0.9 million (see note 12 page 45). The Group’s investment properties comprise land and commercial and residential properties in the Falkland Islands held for rental. The net book value of these properties at 31 March 2010 was unchanged at £1.8 million. The Directors estimate that the fair value of this property portfolio at 31 March 2010 was £2.5 million compared to a book value of £1.8 million (see note 13 page 46). Deferred tax assets relating to future pension liabilities increased by £0.1 million to £0.6 million. Non-property related inventories increased from £2.6 million to £3.5 million at 31 March 2010. £0.4 million of the £3.5 million relates to work in progress at Momart (2009: £0.3 million) and the balance of £3.1 million represent stock held for resale in the Group’s retail operations in the Falklands, which increased by £0.9 million from the exceptionally low levels seen in the prior year (see note 19 page 51). Property related inventories are shown at cost and represent expenditure incurred to 31 March 2010 on the conversion of the former Upland Goose Hotel back into a terrace of residential properties at Marmont Row on the waterfront in Stanley. The total cost of completed properties and ongoing work in progress at 31 March 2010 was £1.2 million (2009: £0.6 million) (see note 19 page 51). Trade and other receivables balances increased from £4.4 million to £4.5 million as at 31 March 2010. At 31 March 2010 the Group retained cash balances on deposit with UK banks of £3.8 million (2009: £3.0 million). During the year the Group paid a final instalment of £1.6 million in deferred consideration to the former owners of Momart and bank loan repayments of a further £0.8 million. Following these scheduled repayments the Group’s loans and bank borrowings were reduced from £7.2 million at the start of the year to £5.3 million as at 31 March 2010. £1.2 million of these loans are due for repayment in the coming year and are shown under current liabilities (see note 22 page 52). Income tax payable within the next 12 months increased to £0.7 million (2009: £0.5 million) reflecting the increase in the Group’s taxable profits. As noted above the Group took the decision to liquidate its interest rate hedges in January 2010 and at 31 March 2010 had no interest in derivative financial instruments (see note 23 page 53). Trade and other payables increased from £8.0 million to £8.2 million at 31 March 2010 (see note 24 page 54). As at 31 March 2010 the liability due in respect of the Group’s defined benefit pension schemes increased to £2.2 million (2009: £2.0 million) as interest rates used to discount the schemes’ future liabilities decreased in line with market trends. The scheme in the Falklands is unfunded and liabilities are met as they fall due from operating cash flow. At PHFC a structured programme of regular annual payments has been agreed with the UK Pensions Regulator to eliminate the deficit of £0.2 million over the medium term (see note 25 page 54). The net deferred tax liabilities at 31 March 2010 were essentially unchanged from the prior year at £2.2 million. Cash flows Cash flow from operating activities With the improved trading performance of the Group companies underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 14% to £4.0 million (2009: £3.5 million). Working capital levels increased by £1.0 million in the current year as the Group invested an additional £0.5 million in the conversion of Marmont Row, retail inventory levels in Stanley recovered to more optimal levels and prepayments and deferred income on Momart commercial contracts increased by £0.5 million. Tax paid of £1.0 million reduced to more normal levels (2009: £1.4 million) following the switch to quarterly payments in advance at Momart in the prior year. 12 ANNUAL REPORT 2010 Managing Director’s Business Review CONTINUED The Group’s Operating Cash Flow can be summarised as follows: Year ended 31 March Underlying PBT Depreciation Interest payable Restructuring costs EBITDA Share based payments (Increase) / decrease in working capital Tax paid Other Net cash flow from operating activities 2010 £m 2009 £m 2.7 0.9 0.4 2.3 0.8 0.6 – (0.2) 4.0 0.2 3.5 0.3 (1.0) 1.6 (1.0) (1.4) 0.2 0.1 2.4 4.1 Cash flow from investing and financing activities In addition to cash flows from its operating activities the Group received £3.6 million from the FOGL share sale and drew down an additional £0.2 million in leasing loans to finance vehicle purchases. Gross cash flow in the year ended 31 March 2010 was £6.4 million (2009: £4.3 million). Year ended 31 March Net cash flow from operating activities Proceeds from sale of shares in FOGL Draw down of loan Gross cash flow Less: Dividends paid Capital expenditure Net bank interest paid Liquidation of financial derivative Deferred consideration re Momart Loan repayments Other Total outflows Net cash flow Cash balance b/fwd Cash balance c/fwd 2010 £m 2009 £m 2.4 3.6 0.4 6.4 (1.1) (1.4) (0.3) (0.4) (1.6) (0.8) – 4.1 – 0.2 4.3 (0.7) (1.1) (0.4) – (1.7) (0.6) 0.2 (5.6) (4.3) 0.8 3.0 3.8 – 3.0 3.0 During the year the Group paid a final dividend of £0.7 million and in February 2010 an interim dividend of £0.4 million. To continue to strengthen its operating base, £1.4 million was invested in fixed assets across the Group (2009: £1.0 million); £0.8 million was committed to complete the extension and car park at the West Store in Stanley and £0.2 million was invested in new vehicles and office equipment at Momart. With strong cash generation leading to lower borrowings, interest paid over the year decreased to £0.3 million (2009: £0.4 million). In January 2010 the Group liquidated its outstanding interest rate collars at a cash cost of £0.4 million, made scheduled repayments of bank loans of £0.8 million (2009: £0.6 million) and paid £1.6 million in deferred consideration in connection with the acquisition of Momart (2009: £1.7 million). After making these payments totalling £5.6 million the Group’s enjoyed a cash surplus of £0.8 million taking its cash deposits to £3.8 million (2009: £3.0 million). Business drivers, risk factors and key performance indicators Business drivers All the Group’s businesses are consumer oriented and their success is linked to general economic conditions in their markets. Inflation, employment levels, interest rates and government spending programmes all have an effect on disposable income and consumer confidence. The Group’s businesses in the Falklands and Gosport have strong ties to the local communities they serve and activity is linked in turn to the local demand for their goods and services. In addition demand is boosted by tourist activity and both locations have benefited from increasing tourist numbers in recent years. In the Falklands the strength of the economy is closely linked to the fortunes of the fishing industry and in particular the success of the unpredictable illex squid season which runs from February to May. In the year ended 31 March 2010 the commencement of the oil exploration had a positive impact and this is also expected to have to benefit the local economy in the current and future years. If the programme was to cease this stimulus would end. The commercialisation of discoveries is likely to be of significant long term benefit to the economy of the Falkland Islands. At Momart activity in the art market is closely correlated with the performance the global economy albeit with a time lag. In the commercial art market, levels of disposable income among high net worth individuals are a key driver and in the museums sector government and corporate sponsorship are important sources of funding in addition to admissions revenue which is increasing. However pressures on Government spending will have a negative FALKLAND ISLANDS HOLDINGS PLC 13 impact on institutional budgets and the number of exhibitions; in the longer term this should lead to more out-sourcing of specialist services by museums and institutions but in the near term a further reduction in the level of government subsidised exhibitions seems likely. Major international exhibitions which are displayed in a number of global locations as part of cultural diplomacy initiatives are an important source of revenue for museums and galleries and the London Olympics should be an opportunity for such activity. In addition, the art market is still continuing to develop globally with the emergence of new buyers, patrons and artists in the Middle East, Far East and Russia. Risk factors PHFC and FIC are both sensitive to changes in local economic conditions. The level of local competition also affects performance. In the Falklands, FIC faces competition in most of its operations but due to the Company’s long history and accumulated expertise FIC has a leading market position in most sectors in which it operates. The situation is fluid and maintaining leadership depends on continued innovation, investment and a commitment to excellence in customer service. Argentina continues to make a claim against the UK’s sovereignty of the Falkland Islands and in recent months has sought to impose restrictions on vessels transiting Argentinian waters en route to the Falklands. However the UK government has re-affirmed its sovereignty in unequivocal terms and key trade and logistic links to the UK are unaffected. However Argentina’s continuing protests are likely to delay the development of further commercial links to the Falklands’ South American neighbours. Although there is no other directly competing service, in Portsmouth customers do have a choice and are able to travel by car or public transport round the harbour. Maintaining and promoting the relative attractions of using the ferry whether for commuting to work, shopping or for tourism is a key focus of PHFC’s strategy and we will continue to work closely with local authorities and other public transport providers to reinforce the ferry’s position as a, faster more cost effective, and environmentally friendly alternative to travelling by car. For Momart the physical security of artworks is of paramount importance and the Company goes to great lengths to guard against the risk of theft or damage to the works in its care. Beyond physical security and the resulting risk to the Company’s reputation, the risks faced by Momart tend to be those factors which could impact the global art market. In particular the reduction in the personal wealth of collectors and investors will be likely to result in a contraction of personal or institutional budgets which in turn would lead to a reduction in the movement and display of art. The emergence of new competitors could also impact the business adversely. In addition because much of Momart’s business involves working with overseas partners, volatility in the Sterling/Dollar and Sterling/Euro exchange rates has a direct effect on Momart’s cost base and profitability. Key performance indicators At 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 performance, especially for the retail outlets which account for two- thirds of revenues. In addition to sales trends gross margins by product and general costs are also kept under close review. At PHFC, passenger numbers and the average fare yield are monitored on a weekly basis, and other key concerns are ferry reliability and passenger safety as well as a focus on costs and net profitability. In Momart, forward sales projections are monitored and updated and these are an important predictive indicator which facilitates forward planning. In addition, order intake and the conversion rate in bidding for contracts are reviewed on a regular basis. Direct costs and the gross contribution of individual contracts are monitored closely as are the level of indirect costs and the overall amount of overtime being worked. Trading outlook The economic backdrop remains uncertain and the Board does not foresee a substantial improvement in trading conditions during the current year. However, with substantially reduced borrowings and the inherent strength of each operating company, the Group is well placed to weather the current difficult trading environment and benefit in the upturn. Whilst the Board remains remain cautious about prospects for growth in the current year ahead, it remains confident about the long-term future of the Group. John Foster Managing Director 23 June 2010 14 ANNUAL REPORT 2010 Board of Directors and Secretary David Hudd (65) 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 non-executive Deputy Chairman of Falklands Oil and Gas Limited. John Foster (52) Managing Director John joined the Board on 26 January 2005. He is a Chartered Accountant and previously served as Finance Director for international software company Macro 4 plc and world famous toy retailer, Hamleys plc. Prior to joining Hamleys, he spent three years in charge of acquisitions and disposals at FTSE 250 company Ascot plc and before that worked for nine years as a venture capitalist with a leading investment bank in the City. Mike Killingley (59) 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. He was previously non-executive Chairman of Southern Vectis plc and Conder Environmental plc, both listed on AIM. He is Chairman of the Audit Committee and a member of the Remuneration Committee. Jeremy Brade (48) Non-executive Director Jeremy joined the Board on September 2009. He is a Director and Private Equity Partner at J O Hambro Capital Management Limited, where he has worked since 2001. Jeremy had previously been with the Foreign and Commonwealth Office (FCO) where he served at the British High Commission in New Delhi and as the representative of Cyrus Vance and Lord Owen at the International Conference on the Former Yugoslavia. Prior to joining the Diplomatic Service, Jeremy was an Army Officer. James Ivins (45) Company Secretary James joined the Group as Company Secretary on 26 February 2007. He is a Fellow of the Chartered Association of Certified Accountants. Directors’ Report FALKLAND ISLANDS HOLDINGS PLC 15 The Directors present their Annual Report and the financial statements for the Company and for the Group for the year ended 31 March 2010. Results and dividend The Group’s result for the year is set out in the Consolidated Income Statement on page 21. The Group profit for the year after taxation amounted to £5,256,000 (2009: loss £1,153,000). Basic earnings per share were 58.2p (2009: -12.8p). The Directors recommend a dividend of 5.0p per share which, in addition to the interim dividend already announced, takes the total dividend proposed for the year to 9.0p (2009: 8.0p) which, if approved by shareholders at the forthcoming Annual General Meeting will be paid on 29 October 2010 to shareholders on the register at close of business on 17 September 2010. 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 8.0p per share in respect of the previous year ended 31 March 2009 and an interim dividend of 4.0p per share in respect of the current year. Principal activities and business review The business of the Group during the year ended 31 March 2010 was general trading in the Falkland Islands, the operation of a ferry across Portsmouth Harbour and the provision of international arts logistics and storage services. The principal activities of the Group are discussed in more detail in the Business Review on pages 4 to 13 which 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 Sir Harry Solomon resigned from the Board on 31 December 2009. The Board wishes to record its appreciation for his contribution and long service to the 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 17 and 18. 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 effort 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 or 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 25 on pages 54 to 59. Share capital and substantial interests in shares During the year 91,300 share options were exercised (2009: nil). There have been no changes to the authorised share capital which remains 12,500,000 shares. Further information about the Company’s share capital is given in note 27 on page 63. Details of the Company’s executive share option scheme and employee ownership plan can be found on pages 17 and 18 and in note 26 on pages 59 and 60. 16 ANNUAL REPORT 2010 Directors’ Report CONTINUED The Company has been notified of the following substantial interests in the issued ordinary shares of the Company as at 31 March 2010. L S Licht Artemis Investment Management Sir Harry Solomon Dolphin Fund plc Number of shares Percentage of shares in issue 750,000 424,419 333,677 387,109 8.24 4.67 3.67 4.26 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 payment practice. As a holding company, the Company had no trade creditors at either 31 March 2010 or 31 March 2009. Charitable and political donations Charitable donations made by the Group during the year amounted to £28,737 (2009: £15,401), largely to local community charities in Gosport and the Falkland Islands. In the Falkland Islands donations amounted to £16,120, of which the largest was £7,922 to the Falkland Islands Overseas Games Association. There were no political donations. Disclosure of information to auditors The Directors who held office at the date 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 Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 2.30 pm on 9 September 2010. The Notice of the Annual General Meeting and a description of the special business to be put to the meeting are considered in a separate Circular to Shareholders which accompanies this document. FALKLAND ISLANDS HOLDINGS PLC 17 Details of Directors’ remuneration and emoluments (audited information) The remuneration of non-executive Directors consists only of annual fees for their services both as members of the Board and of 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 2010 and in the preceding year follows: Bonuses £’000 Benefits £’000 David Hudd John Foster Mike Killingley Leonard Licht Sir Harry Solomon Jeremy Brade Salary £’000 100 158 35 – 15 14 80 85 – – – – 322 165 Gains in respect of Pensions share options £’000 – 25 – – – – 25 £’000 183 – – – – – – 2010 Total £’000 363 268 35 – 15 14 2009 Total £’000 100 205 30 15 20 – 695 370 – – – – – – – Directors’ interests in shares As at 31 March 2010, the share options of executive Directors may be summarised as follows: Opening balance Date of grant Number of shares D L Hudd Number of shares J L Foster Exercise price Exercisable from Expiry date 15 Aug 2002 10 Feb 2005 14 June 2005 13 July 2006 5 July 2007 7 Aug 2007 81,300 – £1.841/2 – 57,692 £5.20 49,411 14,117 £4.25 59,843 28,346 £3.171/2 3,780 3,780 £2.50 – 27,517 £3.30 15 Aug 2005 10 Feb 2008 14 June 2008 13 July 2009 1 Aug 2010 7 Aug 2010 14 Aug 2012 9 Feb 2015 13 June 2015 12 July 2016 31 July 2017 6 Aug 2017 Total at 31 March 2009 194,334 129,452 Lapsed in year Issued in year Exercised in year 13 July 2009 15 July 2009 9 March 2010 (59,843) (28,346) £3.171/2 44,550 44,550 £2.90 15 July 2012 14 July 2019 (81,300) – £1.841/2 Total at 31 March 2010 97,741 145,656 18 ANNUAL REPORT 2010 Directors’ Report CONTINUED The mid-market price of the Company’s shares on 31 March 2010 was 335 pence and the range in the year was 185 pence to 473 pence. The Directors’ options extant at 31 March 2010 totalled 243,397 and represented 2.7% of the Company’s issued share capital. Under the Company’s executive share option scheme, executive Directors and senior executives have been granted options to acquire ordinary shares in the Company after a period of three years from the date of the grant. All outstanding options have been granted at an option price of not less than 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 Foster in August 2007 may normally only be exercised if the compound annual growth (“CAGR”) of the share price of the Company is at least 10% over three years from the date of the grant. If CAGR is 10% the option may only be exercised as to half the shares comprised in it. The option may only be exercised in full if CAGR is at least 20%. For CAGR between 10% and 20%, the option may be exercised in respect of a rising proportion of the shares, calculated on a straight line basis. The options granted to Mr Hudd and Mr Foster in July 2009 may normally only be exercised subject to the satisfaction of performance criteria relating to the growth in the Company’s total shareholder return (“TSR”) over the three year period commencing 19 July 2009 (the “performance period”) relative to the TSR growth of all companies in the FTSE AIM All-Share Index (the “Index”) over the same period (the “TSR Condition”). The TSR Condition provides for the options to become exercisable as follows: Percentage by which the Company’s TSR growth exceeds the Index’s TSR growth during the Performance Period Percentage of Option shares which become exercisable 20% or more 10% Less than 10% 100% 10% 0% More than 10% but less than 20% Between 10% and 100% on a straight line basis In addition to the share options set out above, as at 31 March 2010 the interests of the Directors, their immediate families and related trusts in the shares of the Company were as shown below: David Hudd John Foster Mike Killingley Jeremy Brade Ordinary shares Ordinary shares as at 31 March 2010 as at 31 March 2009 82,382 10,000 10,000 2,000 56,000 10,000 10,000 – FALKLAND ISLANDS HOLDINGS PLC 19 Statement of Directors’ responsibilities in respect of the Directors’ Report and financial statements The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company 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 they have been prepared in accordance with IFRSs as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. 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. Approved by the Board and signed on its behalf by: James Ivins Secretary 23 June 2010 Kenburgh Court 133-137 South Street Bishop’s Stortford Hertfordshire CM23 3HX 20 ANNUAL REPORT 2010 Independent Auditor’s Report to the members of Falkland Islands Holdings plc We have audited the financial statements of Falkland Islands Holdings plc for the year ended 31 March 2010. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 As explained more fully in the Directors’ Responsibilities Statement set out on Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (“APB’s”) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKNP. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2010 and of the Group’s profit for the year then ended; • • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion: • the details of the Directors’ Remuneration and emoluments which we were engaged to audit has been properly prepared in accordance with schedule 8 to the Companies Act 2006 The Large and Medium-sized companies and Groups (Accounts and Reports) Regulations 2008, as if those requirements were to apply to the Company; and • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements and the details of the Directors’ remuneration and emoluments which we were engaged to audit are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Tim Widdas (Senior Statutory Auditor) For and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants St Nicholas House 31 Park Row Nottingham NG1 6FQ 23 June 2010 Consolidated Income Statement FOR THE YEAR ENDED 31 MARCH 2010 Before Amortisation amortisation & non-trading FALKLAND ISLANDS HOLDINGS PLC 21 Before Amortisation amortisation & non-trading & non-trading items items (note 5) Total As restated As restated As restated Notes 3 Revenue Cost of sales Gross profit & non-trading items 2010 £’000 29,224 (17,237) 11,987 Other administrative expenses (8,868) items (note 5) 2010 £’000 Total 2010 £’000 2009 £’000 2009 £’000 – – – – 29,224 32,251 (17,237) (20,158) 11,987 12,093 (8,868) (9,214) – – – – 2009 £’000 32,251 (20,158) 12,093 (9,214) Amortisation of intangible assets Goodwill impairment Restructuring costs – – – (398) (398) – – – – – – – (398) (398) (1,983) (1,983) (228) (228) Operating expenses (8,868) (398) (9,266) (9,214) (2,609) (11,823) Gain on disposal of available-for-sale equity securities Compensation for early vacation of leasehold premises Other income 4 Other operating income – – 15 15 3,089 3,089 245 – 245 15 3,334 3,349 – – 15 15 – – – – Operating profit 3,134 2,936 6,070 2,894 (2,609) – – 15 15 285 172 Finance income Finance expense 8 Net financing costs 111 (557) (446) 45 – 45 156 (557) 172 (750) – (334) (1,084) (401) (578) (334) (912) Profit / (loss) before tax from continuing operations 2,688 2,981 5,669 2,316 (2,943) 9 Taxation (705) 292 (413) (605) 79 (627) (526) Profit / (loss) for the year attributable to equity holders of the Company 1,983 3,273 5,256 1,711 (2,864) (1,153) 10 Earnings per share Basic Diluted 22.0p 21.7p 58.2p 57.5p 19.0p 18.8p (12.8)p (12.8)p 22 ANNUAL REPORT 2010 Consolidated Statement of Comprehensive Income FOR THE YEAR ENDED 31 MARCH 2010 Gain / (loss) on valuation of available-for-sale equity securities 6,828 (7,560) 2010 £’000 2009 £’000 Transfer to the income statement on sale of available-for-sale equity securities (1,683) Share-based payments Repurchase of equity interest PHFC actuarial loss on pension scheme FIC actuarial (loss) / gain on pension scheme Movement on deferred tax asset relating to pension schemes Other comprehensive income / (expense) Profit / (loss) for the year Total comprehensive income / (expense) – 297 – (86) 50 13 240 (75) (55) (195) 124 5,184 (7,286) 5,256 (1,153) 10,440 (8,439) Consolidated Balance Sheet AT 31 MARCH 2010 Notes 11 12 13 15 Non-current assets Intangible assets Property, plant and equipment Investment properties Financial assets – available for sale equity securities 16 Non-current assets held for sale 17 Other financial assets 18 Deferred tax assets Total non-current assets Current assets Trading inventories Property inventories Inventories Trade and other receivables 19 20 17 Other financial assets 21 Cash and cash equivalents Total current assets TOTAL ASSETS Current liabilities 22 Interest bearing loans and borrowings Income tax payable 23 Derivative financial instruments 24 Trade and other payables Total current liabilities Non-current liabilities 22 25 Interest bearing loans and borrowings Employee benefits 18 Deferred tax liabilities Total non-current liabilities TOTAL LIABILITIES Net assets 27 Capital and reserves Equity share capital Share premium account Other reserves Retained earnings Financial assets fair value reserve Total equity FALKLAND ISLANDS HOLDINGS PLC 23 2010 £’000 As restated 2009 £’000 13,509 13,907 7,483 1,777 7,033 1,769 15,542 10,890 20 52 621 20 58 516 39,004 34,193 3,489 1,220 4,709 4,535 206 3,810 2,570 639 3,209 4,424 159 3,004 13,260 10,796 52,264 44,989 (1,218) (683) – (2,142) (518) (406) (8,219) (7,913) (10,120) (10,979) (4,055) (2,237) (1,615) (7,907) (5,053) (2,036) (2,054) (9,143) (18,027) (20,122) 34,237 24,867 910 7,324 1,162 11,260 13,581 34,237 906 7,206 1,162 7,157 8,436 24,867 These financial statements were approved by the Board of Directors on 23 June 2010 and were signed on its behalf by: J L Foster Director 24 ANNUAL REPORT 2010 Company Balance Sheet AT 31 MARCH 2010 Notes Non-current assets 14 20 18 20 21 Financial assets – investments in subsidiaries Other receivables Deferred tax Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets TOTAL ASSETS Current liabilities 22 Interest bearing loans and borrowings Income tax payable 23 24 Other financial liabilities Trade and other payables Total current liabilities Non-current liabilities 22 Interest bearing loans and borrowings Other liabilities Total non-current liabilities TOTAL LIABILITIES Net assets 27 Capital and reserves Called up share capital Share premium account Other reserves Retained earnings Total equity 2010 £’000 2009 £’000 31,297 31,103 2,916 6,325 – 122 34,213 37,550 15 360 375 19 289 308 34,588 37,858 (928) (1,873) 70 – (413) (38) (406) (413) (1,271) (2,730) (3,140) (3,955) (871) (632) (4,011) (4,587) (5,282) (7,317) 29,306 30,541 910 7,324 6,910 906 7,206 6,910 14,162 15,519 29,306 30,541 These financial statements were approved by the Board of Directors on 23 June 2010 and were signed on its behalf by: J L Foster Director Registered company number: 03416346 Consolidated Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2010 Notes Cash flows from operating activities Profit / (loss) for the year Adjusted for: (i) Non-cash items: Depreciation Fixed asset impairment Amortisation Goodwill impairment Amortisation of loan fees Notional interest charge on deferred consideration Expected return on pension scheme assets Interest cost on pension scheme liabilities (Gain) / loss on remeasurement of derivative financial instruments Settlement of equity interest Equity-settled share-based payment expenses Non-cash items adjustment (ii) Other items: Bank interest receivable Bank interest payable Gain on disposal of available for sale equity securities Loss on disposal of fixed assets Income tax expense Other adjustments Operating cash flow before changes in working capital and provisions (Increase) / decrease in trade and other receivables Increase in property inventories (Increase) / decrease in other inventories Increase in trade and other payables Decrease in provisions and employee benefits Changes in working capital and provisions Cash generated from operations Income taxes paid Net cash flow from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of investment properties Proceeds from the disposal of property, plant and equipment Acquisition of subsidiary, net of cash acquired Proceeds from sale of assets held for sale Proceeds from the sale of available for sale equity securities Interest received Net cash flow from investing activities Cash flow from financing activities Increase in other financial assets Repayment of secured loan Proceeds from new loan Interest paid Liquidation of financial derivative contracts Proceeds from the issue of ordinary share capital Dividends paid Net cash flow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at start of year 21 Cash and cash equivalents at end of year FALKLAND ISLANDS HOLDINGS PLC 25 2010 £’000 As restated 2009 £’000 5,256 (1,153) 907 (30) 398 – 30 48 (17) 149 (45) (75) 240 1,605 (16) 330 (3,089) – 413 (2,362) 4,499 (111) (581) (919) 306 (137) (1,442) 3,057 (708) 2,349 (1,358) (55) 72 (1,621) – 3,584 16 638 (41) (755) 376 (330) (361) 14 (1,084) (2,181) 806 3,004 3,810 840 40 398 1,983 30 104 (22) 152 334 – 297 4,156 (76) 464 – 3 526 917 3,920 929 (363) 770 318 (47) 1,607 5,527 (1,427) 4,100 (954) (100) 1 (1,697) 186 – 76 (2,488) (5) (608) 166 (434) – – (722) (1,603) 9 2,995 3,004 26 ANNUAL REPORT 2010 Company Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2010 Notes Cash flows from operating activities Loss for the year Adjusted for: Net financing costs Amortisation of loan fees Notional interest charge on deferred consideration Loss on remeasurement of financial instruments Impairment charges on investments in subsidiaries Equity-settled share-based payment expenses Settlement of equity interest Income tax expense 2010 £’000 2009 £’000 (330) (10,625) 286 30 48 (45) – 46 (75) (84) 393 30 104 334 13,014 151 – (54) Operating profit before changes in working capital and provisions (124) 3,347 Decrease in trade and other receivables Decrease in trade and other payables Increase in provisions Cash generated from operations Income taxes paid Net cash flow from operating activities Cash flows from investing activities Acquisition of subsidiary Net cash flow from investing activities Cash flow from financing activities Proceeds from new loan Proceeds from inter-company borrowing Repayment of inter-company borrowing Repayment of secured loan Interest paid Liquidation of financial derivative contracts Proceeds from the issue of ordinary share capital Dividends paid Net cash flow from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at start of year 21 Cash and cash equivalents at end of year 4 – 168 48 (70) (22) 12 (658) – 2,701 – 2,701 (1,621) (1,621) (1,553) (1,553) 242 3,648 – (459) (286) (361) 14 – – (514) (332) (393) – – (1,084) (722) 1,714 (1,961) 71 289 360 (813) 1,102 289 Consolidated Statement of Changes in Shareholders’ Equity FOR THE YEAR ENDED 31 MARCH 2010 FALKLAND ISLANDS HOLDINGS PLC 27 Shareholders’ funds at the beginning of the year Profit / (loss) for the year Share-based payments Change in fair value of available-for-sale financial assets Transfer to the income statement on sale of available-for-sale equity securities Actuarial loss on pension net of tax Repurchase of equity interest Total comprehensive income / (expense) for the year Dividends paid Proceeds from the issue of share capital Shareholders’ funds at the end of the year 2010 £’000 2009 £’000 24,867 34,028 5,256 (1,153) 240 297 6,828 (7,560) (1,683) (126) (75) – (23) – 10,440 (8,439) (1,084) (722) 14 – 34,237 24,867 Company Statement of Changes in Shareholders’ Equity FOR THE YEAR ENDED 31 MARCH 2010 Shareholders’ funds at the beginning of the year Profit / (loss) for the year Share-based payments Repurchase of equity interest Total comprehensive expense for the year Dividends paid Proceeds from the issue of share capital Shareholders’ funds at the end of the year 2010 £’000 2009 £’000 30,541 41,591 (330) (10,625) 240 (75) 297 – (165) (10,328) (1,084) (722) 14 – 29,306 30,541 28 ANNUAL REPORT 2010 Notes to the Financial Statements FOR THE YEAR ENDED 31 MARCH 2010 1 Accounting policies General information Falkland Islands Holdings plc (the “Company”) is a company incorporated and domiciled in the UK. Reporting entity The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The parent company financial statements present information about the Company as a separate entity and not about its group. Basis of preparation Both the parent company financial statements and the Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRS”). On publishing the parent company financial statements here together with the group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. The management and development of the Group’s property portfolio in the Falkland Islands is now a significant part of the Group’s trading activity. Accordingly, the Board has decided to report receipts from the disposal of investment property and property developments and rents received from its portfolio of residential and commercial properties as a trading activity within turnover. Associated gains and losses on the disposal of rental properties and property developments are accordingly recognised within gross profit. Prior year comparatives have been amended accordingly. Judgements made by the Directors in the application of these accounting policies that have a significant effect on the financial statements and estimates with a significant risk of material adjustment next year are discussed in note 32. The financial statements are presented in pounds sterling, rounded to the nearest thousand. They are prepared on the historical cost basis except that available-for-sale financial instruments and derivative financial instruments are stated at their fair value. The Directors are responsible for ensuring that the Group has adequate financial resources to meet its projected liquidity requirements and also for ensuring forecast earnings are sufficient to meet the covenants associated with the Group’s banking facilities. As in prior years the Directors have reviewed the Group’s medium term forecasts and considered a number of possible trading scenarios and are satisfied the Group’s existing resources (including committed banking facilities) are sufficient to meet its needs. As a consequence the Directors believe the Group is well placed to manage its business risk. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Managing Director’s Business Review on pages 4 to 13. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Managing Director’s Business Review. In addition note 28 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. After making enquiries the Directors have a reasonable expectation that the Company and Group have adequate reserves to continue in operational existence for the foreseeable future, and have continued to adopt the going concern basis in preparing the financial statements. Basis of consolidation The consolidated financial statements comprise the financial statements of Falkland Islands Holdings plc and its subsidiaries (the “Group”). A subsidiary is any entity Falkland Islands Holdings plc has the power to control the financial and operating policies of so as to obtain benefits from its activities. The financial statements of subsidiaries are prepared for the same reporting period as the parent company. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. FALKLAND ISLANDS HOLDINGS PLC 29 1 Accounting policies CONTINUED Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. All intra-company balances and transactions, including unrealised profits arising from intra-group transactions, are eliminated in full in preparing the consolidated financial statements. Unrealised losses are eliminated but only to the extent that there is no evidence of impairment. Investments in subsidiaries not classified as held-for-sale within the Company balance sheet are stated at cost. Presentation of income statement Due to the non-prescriptive nature under IFRS as to the format of the income statement, the format used by the Group is explained below. Operating profit is the pre-finance profit of continuing activities and acquisitions of the Group, and in order to achieve consistency and comparability, is analysed to show separately the results of normal trading performance (“underlying profit”), individually significant charges and credits, changes in the fair value of derivative financial instruments and amortisation of intangible assets on acquisition. Such items arise because of their size or nature, and in 2010 comprise: • Gain on disposal of equity securities • Compensation for early vacation of leasehold premises • Gain on liquidation of derivative financial instrument contracts • Amortisation of intangible assets. In 2009 such items comprised: • • • • Charges relating to asset impairments which are significant to any reportable segment Charges relating to the Group’s restructuring programme Changes in the fair value of derivative financial instruments Amortisation of intangible assets. Foreign currencies Transactions in foreign currencies are translated to the functional currencies of Group entities at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the relevant rates of exchange ruling at the balance sheet date and the gains or losses thereon are included in the income statement. Non-monetary assets and liabilities are translated using the exchange rate at the date of the initial transaction. Property, plant and equipment Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost comprises purchase price and directly attributable expenses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: Freehold buildings Long leasehold land and buildings Vehicles, plant and equipment Ships 20 – 50 years 50 years 4 – 10 years 15 – 30 years The carrying value of assets and their useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. If an indication of impairment exists, the assets are written down to their recoverable amount and the impairment is charged to the income statement in the period in which it arises. Freehold land and assets-in-construction are not depreciated. 30 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED Investment properties Investment properties are properties held either to earn rental income or for capital appreciation or for both. Investment properties are stated at cost less any accumulated depreciation (calculated on useful economic lives in line with accounting policy, property, plant and equipment above) and any impairment losses. Intangible assets Goodwill Goodwill arises on the acquisition of subsidiaries. Acquisitions prior to 1 April 2006 In respect to acquisitions prior to transition to IFRS, goodwill is recorded on the basis of deemed cost, which represents the amount recorded under previous Generally Accepted Accounting Principles (“GAAP”) as at the date of transition. The classification and accounting treatment of business combinations which occurred prior to transition has not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 April 2006. Acquisitions on or after 1 April 2006 Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the acquired business. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised but reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Amortisation is charged to the income statement on a straight line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Trade name Customer relationships Non-compete agreements Computer software 20 years 6 – 10 years 5 years Acquired computer software is capitalised as an intangible asset on the basis of the cost incurred to acquire and bring the specific software into use. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The estimated useful life of computer software is five years. Impairment of non-financial assets At each reporting date the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists or the asset requires annual impairment testing, the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Impairment losses are recognised in the income statement. Recoverable amount is the greater of an asset’s or cash-generating unit’s fair value less cost to sell or value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses are reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s FALKLAND ISLANDS HOLDINGS PLC 31 1 Accounting policies CONTINUED carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Finance income and expense Net financing costs comprise interest payable, interest receivable, and foreign exchange gains and losses that are recognised in the income statement. Interest income and interest payable are recognised as a profit or loss as they accrue, using the effective interest method. Financial instruments Certain financial instruments held by the Group are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity, except for impairment losses. When these items are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit and loss. Financial instruments classified as available-for-sale are initially recognised at fair value less directly attributable transaction costs. The Group does not use derivative financial instruments for speculative purposes. Derivative financial instruments are initially measured at fair value. Changes in the fair value of derivative financial instruments are recognised in the income statement as they arise. The Group has not applied hedge accounting to its derivative financial instruments. Employee share awards The Group provides benefits to certain employees (including Directors) in the form of share-based payment transactions, whereby the employee renders service in return 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 option input pricing model taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. 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 that the option vests. Where the Company grants options over its own shares to the employees of subsidiaries, it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equal to the equity settled share-based payment charge recognised in its consolidated financial statements with the corresponding credit being recognised directly in equity. Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes all costs incurred in bringing each product to its present location and condition, as follows: The cost of raw materials, consumables and goods for resale comprises purchase cost, on a first-in, first-out basis and where applicable includes expenditure incurred in transportation to the Falkland Islands. Work-in-progress and finished goods cost includes direct materials and labour plus attributable overheads based on a normal level of activity. Construction-in-progress and properties held-for-sale relating to the Group’s property trading portfolio in the Falkland Islands are stated at the lower of cost and net realisable value. Net realisable value is estimated at selling price in the ordinary course of business less costs of disposal. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents the amount receivable by the Group for goods supplied and services rendered in the normal course of business, net of discounts and excluding VAT. Revenue principally arises from retail sales, the provision of ferry services and the provision of storage and transportation services for fine art works. In the 32 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED Falkland Islands revenue also includes proceeds from property sales, property rental income, insurance commissions, revenues billed for shipping and agency activities and port services. Revenue from sale of goods is recognised at the point of sale or dispatch, whilst that of the ferry, fine art logistics and other services is recognised when the service is provided. Revenue from property sales is recognised on completion. For fine art exhibition logistical work undertaken the amount of profit attributable to the stage of completion of a contract is recognised when the outcome of the contract can be seen with reasonable certainty, typically upon successful opening. Turnover for such contracts is stated at the cost appropriate to their stage of completion plus attributable profit, less amounts already recognised. Provision is made for losses as soon as they are foreseeable. Pensions Defined contribution pension schemes The Group operates three defined contribution schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The amount charged to the income statement represents the contributions payable to the schemes in respect to the accounting period. Defined benefit pension schemes The Group also operates two pension schemes providing benefits based on final pensionable pay, one of which is unfunded. The assets of the funded scheme are held separately from those of the Group. The Group’s net obligation in respect of each defined benefit pension plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to its present value; and any unrecognised past service costs and the fair value of the plan assets (at bid price) are deducted. The liability discount rate is the yield at the balance sheet date on AA credit-rated bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the asset recognised is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. The current service cost and costs from settlements and curtailments are charged against operating profit. Past service costs are spread over the period until the benefit increases vest. Interest charged on the scheme liabilities and the expected return on scheme assets are included in other finance costs. Actuarial gains and losses are recognised in full in the period in which they arise in the statement of recognised income and expense. Trade and other receivables Trade receivables are carried at amortised cost, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the income statement. Trade and other payables Trade and other payables are stated at their cost less payments made. Dividends on funds presented within shareholders’ funds Dividends unpaid at the balance sheet date are only recognised as liabilities at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. FALKLAND ISLANDS HOLDINGS PLC 33 1 Accounting policies CONTINUED Interest bearing borrowings Interest bearing borrowings are recognised initially at fair value less directly attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity, in which case it is recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary timing differences are not recognised: • Goodwill not deductible for tax purposes; and • Initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profits. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is recognised at the tax rates that are expected to be applied to the temporary differences when they reverse, based on rates that have been enacted or substantially enacted by the reporting date. Leased assets Leases in which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases. As lessee Rentals in respect of all operating leases are charged to the income statement 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 to the extent they are due within one year, and under non-current assets to the extent that they are due after more than one year, and are stated at the value of the net investment in the agreements. The income from such agreements is credited to the income statement each year so as to give a constant rate of return on the funds invested. Assets held for leasing out under operating leases are included in investment property (where they constitute land and buildings) or in property, plant and equipment (where they do not constitute land and buildings) at cost less accumulated depreciation and impairment losses. Rental income is recognised on a straight-line basis. Lease incentives granted are recognised as an integral part of the total rental income. Finance lease payments Minimum lease payments are apportioned between the finance charge and reduction of the outstanding liability. The finance charge is allocated to each period of the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Non-current assets held for sale and discontinued operations Non-current assets and discontinued operations are classified as held for sale when their carrying values will be recovered principally through sale. They are generally measured at the lower of carrying amount and fair value less costs to sell. 34 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED Provisions Provisions are recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are determined by discounting the expected cash flows at an appropriate pre-tax risk free rate. New accounting standards and interpretations applied During the year the Group has adopted the following standards: Amendments to IAS 1: Presentation of financial statements. IFRS 8: Operating Segments. The Standard introduces a management approach to segment reporting and segment information is consistent with internal management reporting. Amendments to IAS 23: Borrowing costs. No borrowing costs were incurred in relation to construction projects. New accounting standards and interpretations not applied During the year, the International Accounting Standards Board (“IASB”) and International Financial Reporting Interpretations Committee (“IFRIC”) have issued the following standards and interpretations with an effective date after the end of these financial statements, which have not been applied: International Accounting Standards (IAS/IFRS) (accounting periods commencing on or after): Effective date Endorsed IFRS 3 (Revised): Business combinations (2008) Amendments to IAS 39 Financial instruments: Recognition and Measurement: Eligible Hedged Items Amendments to IAS 27 Consolidated and Separate Financial Statements (2008) Amendments to IFRS 2 Group Cash Settled Share-based Payment Transactions Amendments to IAS 32 Classification of Rights Issues Unendorsed IAS 24 Related Party Disclosures IFRS 9 Financial Instruments International Financial Reporting Interpretations Committee (IFRIC) Unendorsed Amendments to IFRIC 14 Extinguishing Financial Liabilities with Equity Instruments Amendments to IFRIC 9 Financial Instruments 1 July 2009 1 July 2009 1 July 2009 1 January 2010 1 February 2010 1 January 2011 1 January 2013 1 July 2010 1 January 2013 The Directors do not anticipate that the adoption of the standards and interpretations listed above will have a material impact on the Group’s or Company’s financial statements in the period of initial application, however additional disclosures will be required. FALKLAND ISLANDS HOLDINGS PLC 35 2 Segmental information Segment information is presented in respect of the Group’s business and geographical segments. The primary reporting format is determined to be by business type: the provision of ferry services; arts logistics and storage; and general trading in the Falkland Islands. The secondary reporting format is determined to be geographical. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. Primary reporting format – business 2010 Revenue Segment operating profit before tax, amortisation and non-trading items Amortisation of intangible assets Compensation for early vacation of leasehold premises Unallocated gain on disposal of available-for-sale equity securities Amortisation and non-trading items Segment operating profit Gain on liquidation of financial derivative Interest income Interest expense Segment profit before tax Taxation Segment profit after tax Assets and liabilities Segment assets Segment liabilities Unallocated assets and liabilities Segment net assets Other segmental information Capital expenditure: Property, plant, equipment Investment properties Depreciation – property, plant and equipment Depreciation – investment properties Amortisation General trading Ferry services Art logistics and storage (Falklands) (Portsmouth) £’000 £’000 (UK) £’000 To tal £’000 12,434 3,718 13,072 29,224 1,377 800 – – – 800 8 21 (85) 744 (245) 498 957 (398) 245 (153) 804 37 12 (334) 519 (201) 318 – – – 1,377 – 78 (138) 1,317 34 1,351 11,590 (8,084) – 8,231 (2,583) – 13,045 (5,270) – 3,506 5,648 7,775 1,087 55 324 40 – 37 – 222 – – 234 – 321 – 398 3,134 (398) 245 3,089 2,936 6,070 45 111 (557) 5,669 (413) 5,256 32,866 (15,937) 17,308 34,237 1,358 55 867 40 398 2010 Underlying profit before tax Segment operating profit before tax, amortisation and non-trading items (as above) Interest expense Interest income Underlying profit before tax General trading Ferry services Art logistics and storage (Falklands) (Portsmouth) £’000 £’000 (UK) £’000 To tal £’000 1,377 (138) 78 1,317 800 (85) 21 736 957 (334) 12 635 3,134 (557) 111 2,688 36 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 2 Segmental information CONTINUED 2009 Revenue General trading Ferry services Art logistics and storage (Falklands) (Portsmouth) £’000 £’000 (UK) £’000 To tal £’000 12,991 3,716 15,544 32,251 Segment operating profit before tax, amortisation and non-trading items 1,256 782 Amortisation of intangible assets Goodwill impairment Restructuring costs Amortisation and non-trading items Segment operating profit Loss on revaluation of financial derivative Finance expense Finance income Segment profit before tax Taxation Segment profit after tax Assets and liabilities Segment assets Segment liabilities Unallocated assets and liabilities Segment net assets Other segmental information Capital expenditure: Property, plant, equipment Investment properties Depreciation – property, plant and equipment Depreciation – investment properties Impairment – ships Amortisation and goodwill impairment – – (124) (124) 1,132 – (119) 84 1,097 (131) 966 9,363 (7,081) – 2,282 335 100 305 36 – – – – – – 782 (57) (220) 80 585 (209) 376 8,487 (2,834) – 5,653 51 – 215 – 40 – 856 (398) (1,983) (104) (2,485) (1,629) (277) (411) 8 (2,309) (186) (2,495) 14,024 (4,870) – 9,154 611 – 284 – – 2,894 (398) (1,983) (228) (2,609) 285 (334) (750) 172 (627) (526) (1,153) 31,874 (14,785) 7,778 24,867 997 100 804 36 40 2,381 2,381 2009 Underlying profit before tax Segment operating profit before tax, amortisation and non-trading items (as above) Interest expense Interest income Underlying profit before tax General trading Ferry services Art logistics and storage (Falklands) (Portsmouth) £’000 £’000 (UK) £’000 To tal £’000 1,256 (119) 84 1,221 782 (220) 80 642 856 (411) 8 453 2,894 (750) 172 2,316 2 Segmental information CONTINUED Secondary reporting format – geographic 2010 Revenue Assets and liabilities Segment assets Other segment information Capital expenditure 2009 Revenue Assets and liabilities Segment assets Other segment information Capital expenditure 3 Revenue Sale of goods Rendering of services Property sales in the Falkland Islands Total revenue 4 Other operating income Gain on disposal of available-for-sale equity securities Compensation for early vacation of leasehold premises Foreign exchange commission receivable Net loss on disposal of property, plant and equipment Total other operating income FALKLAND ISLANDS HOLDINGS PLC 37 United Kingdom £’000 Falkland Islands £’000 Total £’000 16,790 12,434 29,224 21,276 11,590 32,866 271 1,142 1,413 United Kingdom £’000 Falkland Islands £’000 Total £’000 19,260 12,991 32,251 22,511 9,363 31,874 662 435 1,097 2010 £’000 14,214 14,651 359 2009 £’000 14,476 17,501 274 29,224 32,251 2010 £’000 3,089 245 15 – 3,349 2009 £’000 – – 18 (3) 15 38 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 5 Amortisation, non-trading items and underlying profit Gain on disposal of available-for-sale equity securities 1 Compensation for early vacation of leasehold premises 2 Gain on liquidation of derivative financial instrument 3 Amortisation charge on Momart intangible assets acquired Goodwill impairment charge recognised in the year 4 Restructuring charges incurred 5 Loss on revaluation of derivative financial instruments 6 Amortisation and non-trading items gain / (charge) Profit / (loss) before tax as reported adjusted for: amortisation and non-trading (gains) / charges Underlying profit 2010 2010 £’000 3,089 245 45 (398) – – – 2009 £’000 – – – (398) (1,983) (228) (334) 2,981 (2,943) 5,669 (2,981) 2,688 (627) 2,701 2,074 1 Gain on disposal of available-for-sale equity securities On 30 November the Group sold 3,000,000 Falkland Oil and Gas Limited shares, representing 20% of its holding at that date. The sale generated proceeds of £3.6 million and a gain on disposal of £3.1 million. 2 Compensation for early vacation of leasehold premises An agreement for the payment of compensation to Momart Limited for the early vacation of leasehold premises in April 2008 was settled during the year with total compensation received of £245,000. 3 Gain on liquidation of financial instrument In January 2010 the Group elected to liquidate its base rate cap and floor contracts in respect to loans taken out in relation to a ferry delivered in 2005 and the Momart acquisition in March 2008 at a cost of £352,000. IAS 39 had required these derivative financial instruments to be recognised in the balance sheet at fair value as an asset or liability. At 31 March 2009 this gave rise to a liability of £406,000. On liquidation after expensing arrangement fees the Group recognised a gain of £45,000 on termination of the contracts. 2009 4 Impairment charges During the year the Group in accordance with IAS 36 “Impairment of assets” undertook a review of the carrying value of goodwill. As a consequence of this review, after taking account of a reduction in activity across the world art markets, an impairment charge of £1,983,000 was recognised in connection with the goodwill relating to the acquisition of Momart International Limited in March 2008. 5 Restructuring charges Charges of £228,000 incurred within operating profit related primarily to employment termination costs. 6 Loss on revaluation of derivative financial instruments IAS 39 requires derivative financial instruments to be valued at the balance sheet date and any difference between that value and the intrinsic value of the instrument to be reflected in the balance sheet as an asset or liability. Any subsequent change in value is reflected in the Income Statement until hedge accounting is achieved. At the year end the derivatives the Group held resulted in a loss or revaluation of £334,000. FALKLAND ISLANDS HOLDINGS PLC 39 6 Expenses and auditors’ remuneration Included in profit / loss are the following expenses / (income): Group Company Direct operating expenses arising from investment properties which generated rental income in the period Depreciation Impairment charge – ships Amortisation of intangible assets Foreign currency differences Impairment (gain) / loss on trade and other receivables Cost of inventories recognised as an expense Operating lease payments Auditors’ remuneration Audit of these financial statements and amounts receivable by auditors and their associates in respect of: Audit of subsidiaries’ financial statements pursuant to legislation Other services relating to taxation All other services Total auditors’ remuneration 2010 £’000 65 867 – 398 (38) (48) 2009 £’000 99 804 40 398 (89) 91 7,597 649 7,393 594 2010 £’000 2009 £’000 – – – – – – – – 2010 £’000 25 60 13 – 98 – – – – – – – – 2009 £’000 25 60 – – 85 Amounts paid to the Company’s auditors and their associates in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. 7 Staff numbers and cost The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows: At Gosport Ferry At Falklands Islands Company, in Stanley At Falklands Islands Support, in UK At Momart Limited At Head Office Total average staff numbers Number of employees Number of employees Group Company 2010 £’000 41 83 4 104 3 235 2009 £’000 41 88 4 118 3 254 2010 £’000 2009 £’000 – – – – 3 3 – – – – 3 3 40 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 7 Staff numbers and cost CONTINUED The aggregate payroll cost of these persons were as follows: Wages and salaries Share-based payments (see note 26) Social security costs Contributions to defined contribution plans Total employment costs Group Company 2010 £’000 2009 £’000 7,471 7,958 240 650 357 297 665 403 8,718 9,323 2010 £’000 546 46 71 25 688 2009 £’000 529 151 58 25 763 Details of Directors’ remuneration are provided in the Directors’ Report, under the heading “Details of Directors’ Remuneration and Emoluments” on page 17. 8 Finance income and expense Bank interest receivable Finance lease interest receivable Expected return on pension scheme assets Gain on liquidation of derivative financial instrument Total financial income Interest payable on bank loans Interest cost on pension scheme liabilities Amortisation of loan fees Interest attributable to deferred consideration payable (Loss) on remeasurement of derivative financial instrument Total financial expense Net financing cost Bank interest receivable Interest payable on bank loans Net bank interest Other financing charges (from above) Net financing cost 2010 £’000 16 78 17 45 156 (330) (149) (30) (48) – (557) (401) 2010 £’000 16 (330) (314) (87) (401) 2009 £’000 76 74 22 – 172 (464) (152) (30) (104) (334) (1,084) (912) 2009 £’000 76 (464) (388) (524) (912) 9 Taxation Recognised in the income statement Current tax expense Current year Adjustments for prior years Current tax expense Deferred tax expense Origination and reversal of temporary differences Reduction in tax rate Adjustments for prior years Deferred tax (credit) / expense Total tax expense Reconciliation of tax charge Profit / (loss) on ordinary activities before tax Tax using the UK corporation tax rate of 28% (2009: 28%) Expenses not deductible for tax purposes Other timing differences Non taxable income on disposals Schedule 23 deduction Excess foreign tax Marginal relief Lower tax charges overseas Reduction in deferred tax rate Adjustments to tax charge in respect of previous periods Deferred tax asset not recognised Total tax expense Tax recognised directly in equity Current tax recognised directly in equity Deferred tax recognised directly in equity Total tax credit recognised directly in equity FALKLAND ISLANDS HOLDINGS PLC 41 2010 £’000 852 (15) 837 (174) (2) (248) (424) 413 2010 £’000 5,669 1,587 142 (57) (915) (60) – (6) (15) – (263) – 413 2010 £’000 – (124) (124) 2009 £’000 718 (130) 588 (158) – 96 (62) 526 2009 £’000 (627) (176) 697 – – – (39) (4) (1) (34) 83 – 526 2009 £’000 – (13) (13) 42 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 10 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 Ownership Plan (“ESOP”) (see note 27). 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 the ESOP, adjusted to assume the full issue of share options outstanding, to the extent that they are dilutive. Profit / (loss) on ordinary activities after taxation (see page 21) Weighted average number of shares in issue Less: shares held under the ESOP Average number of shares in issue excluding the ESOP Maximum dilution with regards to share options1 Diluted weighted average number of shares 1 Potential ordinary shares are not considered dilutive where their conversion would reduce loss per share. Basic earnings per share Diluted earnings per share 2010 £’000 2009 £’000 5,256 (1,153) 2010 Number 2009 Number 9,068,770 9,060,796 (36,499) (36,499) 9,032,271 9,024,297 114,328 – 9,146,599 9,024,297 2010 2009 58.2p 57.5p (12.8)p (12.8)p To provide a comparison of earnings per share on underlying performance, the calculation below sets out basic and diluted earnings per share based on profits before amortisation and non-trading items. Earnings per share on underlying profit Profit after tax before non-trading items and amortisation (see note 5) Weighted average number of shares in issue excluding ESOP (from above) Diluted weighted average number of shares (from above) Basic earnings per share on underlying profit Diluted earnings per share on underlying profit 2010 £’000 As restated 2009 £’000 1,983 1,711 9,032,271 9,024,297 9,146,599 9,120,506 22.0p 21.7p 19.0p 18.8p FALKLAND ISLANDS HOLDINGS PLC 43 11 Intangible assets Cost: As at 1 April 2008 Adjustments to fair value At 31 March 2009 Adjustments to fair value As at 31 March 2010 Accumulated amortisation: As at 1 April 2008 Amortisation for the year Impairment charged in the year As at 31 March 2009 Amortisation for the year At 31 March 2010 Net book value: As at 31 March 2008 As at 31 March 2009 As at 31 March 2010 Customer relationships £’000 Group Non-compete Agreements £’000 Brand names £’000 1,882 2,823 – – 1,882 2,823 – – 1,882 2,823 (17) (243) – (260) (243) (503) 1,865 1,622 1,379 (10) (141) – (151) (141) (292) 2,813 2,672 2,531 72 – 72 – 72 (1) (14) – (15) (14) (29) 71 57 43 Goodwill £’000 Total £’000 11,586 16,363 (47) (47) 11,539 16,316 – – 11,539 16,316 – – (1,983) (1,983) – (28) (398) (1,983) (2,409) (398) (1,983) (2,807) 11,586 9,556 9,556 16,335 13,907 13,509 Amortisation and impairment charges are recognised in other administrative expense in the income statement. Customer relationships – are on-going relationships, both contractual and otherwise, with customers considered to be of future economic benefit to the Group with estimated economic lives of 6 – 10 years. Brand names – is the Momart brand considered to be of future economic value to the Group with an estimated useful economic life of 20 years. Non-compete agreements – are contractually binding agreements with senior Momart personnel not to compete with the Group for five years in the event of their leaving the Group’s service. Goodwill Goodwill is allocated to the Group’s cash generating units (“CGUs”) which principally comprise its business segments. A segment level summary of goodwill is shown below: Brought forward at 1 April 2008 Impairment loss recognised in year Adjustment to fair value Carried forward at 31 March 2009 Balance at 31 March 2010 Art logistics and storage £’000 Ferry services (Portsmouth) £’000 7,607 (1,983) (47) 5,577 5,577 3,979 – – 3,979 3,979 Total £’000 11,586 (1,983) (47) 9,556 9,556 44 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 11 Intangible assets CONTINUED Impairment The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. An impairment test is a comparison of the carrying value of the assets of a CGU, based on a value-in-use calculation, to their recoverable amounts. Where the recoverable amount is less than the carrying value an impairment results. During the year the goodwill for each CGU was separately assessed and tested for impairment, with no impairment charges resulting (2009: £1,983,000). As part of testing goodwill for impairment detailed forecasts of operating cash flows for the next five years are used, which are based on approved budgets and plans by the Board of Falkland Islands Holdings plc. These forecasts represent the best estimate of future performance of the CGUs based on past performance and expectations for the market development of the CGU. A number of key assumptions are used as part of impairment testing. These key assumptions are made by management reflecting past experience combined with their knowledge of as to future performance and relevant external sources of information. Sensitivity analysis as at 31 March 2010 has indicated that no reasonably foreseeable change in the key assumptions used in the impairment model would result in a significant impairment charge being recorded in the financial statements. Discount rates Within impairment testing models cash flows of all CGUs are discounted using a pre tax discount rate of 14.1% (2009: 13.3%). Management have determined that this rate is appropriate as the risk adjustment applied within the discount rate reflects the risks and rewards inherent to each CGU, based on the industry and geographical location it is based within. Both Ferry Services and Art Logistics and Storage have stable core revenue streams and are considered to have a similar risk profile. Long term growth rates Long term growth rates of 2% have been used for all CGUs as part of the impairment testing models. This growth rate does not exceed the long term average growth rate for the UK, in which the CGUs operate. Other assumptions Other assumptions used within impairment testing models include an estimation of long term effective tax rate for the CGUs and the terminal values of the CGUs. The long-term effective rate of tax is 28%, consistent with the current UK tax rate. The terminal value is calculated based on the Gordon Growth model. Sensitivity to changes in assumptions Using a discounted cash flow methodology necessarily involves making numerous estimates and assumptions regarding growth, operating margins, tax rates, appropriate discount rates, capital expenditure levels and working capital requirements. These estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material. In addition, judgements are applied by the Directors in determining the level of cash generating units and the criteria used to determine which assets should be aggregated. A difference in testing levels could further affect whether an impairment is recorded and the extent of impairment loss. Assumptions specific to ferry services (Portsmouth) Value in use was determined by discounting future cash flows in line with the other assumptions discussed above. Management have forecast consistent growth in cash flows of 2% in both the short term and the long term. The value in use was determined to exceed the carrying amount and no impairment has been recognised. It is not considered that a reasonably possible change in any of these assumptions would generate a different impairment test outcome to the one included in this annual report. Assumptions specific to arts logistics and storage (UK) Value in use was determined by discounting future cash flows in line with the other assumptions discussed above. Cash flows were projected based on actual operating results and the five-year business plan. No growth was projected in the next two years, and 10.5% growth in the following three years, this is considered to be a prudent estimate given uncertainty in the economy. The long term growth rate is projected to be 2% thereafter. The carrying value of the unit was determined to not be higher than its recoverable amount and no impairment was recognised (2009: loss £1,983,000). FALKLAND ISLANDS HOLDINGS PLC 45 12 Property, plant and equipment Cost: At 1 April 2008 Reclassified Additions in year Recognised as investment property Disposals At 31 March 2009 Additions in year Transferred to freehold land and buildings Disposals At 31 March 2010 Accumulated depreciation: At 1 April 2008 Charge for the year Impairment Disposals At 31 March 2009 Charge for the year Disposals At 31 March 2010 Net book value: At 1 April 2008 At 31 March 2009 At 31 March 2010 The Company has no tangible fixed assets. Group Long leasehold land and buildings £’000 693 – 249 – – 942 22 – – Freehold land and buildings £’000 3,766 (319) 34 (180) – 3,301 652 43 – Vehicles, plant and equipment £’000 Ships £’000 Total £’000 3,363 3,768 11,590 – 21 – – 3,384 24 – (99) – 650 – (26) 4,392 660 – – (319) 997 (180) (26) 12,062 1,358 – (99) 3,996 964 3,309 5,052 13,321 1,517 73 – – 1,590 76 – 1,666 2,249 1,711 2,330 75 18 – – 93 122 – 215 618 849 749 415 138 40 – 593 143 (58) 678 2,200 4,207 575 – (22) 804 40 (22) 2,753 5,029 526 – 867 (58) 3,279 5,838 2,948 2,791 2,631 1,568 1,639 1,773 7,383 7,033 7,483 Assets in construction £’000 – – 43 – – 43 – (43) – – – – – – – – – – – 43 – 46 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 13 Investment property At 1 April 2008 Transferred from fixed assets on completion Acquisitions Disposals At 31 March 2009 Transferred from fixed assets on completion Acquisitions Disposals At 1 March 2010 Accumulated depreciation: At 1 April 2008 Charge for the year Disposals At 31 March 2009 Charge for the year Disposals At 1 March 2010 Net book value at 1 April 2008 Net book value at 31 March 2009 Net book value at 31 March 2010 Residential and commercial property £’000 Group Freehold land £’000 Total £’000 901 180 100 (50) 720 1,621 – – – 180 100 (50) 1,131 720 1,851 – 55 (20) – – – – 55 (20) 1,166 720 1,886 64 36 (18) 82 40 (13) 109 837 1,049 1,057 – – – – – – – 720 720 720 64 36 (18) 82 40 (13) 109 1,557 1,769 1,777 Investment properties comprise residential and commercial property held for rental in the Falklands with a fair value of approximately £2.5 million at 31 March 2010. This valuation was undertaken by a director of a subsidiary company who is resident in the Falkland Islands and is considered to have the relevant knowledge and experience to undertake the valuation. The Group also holds several hundreds of acres of land for which it is not possible to determine fair value, due to the restricted and limited market for freehold land in the Falkland Islands. Nonetheless the carrying value of land held at historic cost remains sufficiently low to enable directors to satisfy themselves that no impairment exists at the balance sheet date. The Company holds no investment properties. FALKLAND ISLANDS HOLDINGS PLC 47 14 Investments in subsidiaries The Group and Company have the following direct and indirect investments in subsidiaries: Country of incorporation Class of shares held Ownership % 2010 2009 The Falkland Islands Company Limited The Falkland Islands Trading Company Limited UK UK Ordinary shares of £1 Preference shares of £10 Ordinary shares of £1 Darwin Shipping Limited* Falkland Islands Ordinary shares of £1 The Portsmouth Harbour Ferry Company Limited Portsea Harbour Company Limited* Clarence Marine Engineering Limited* Gosport Ferry Limited* Momart International Limited Momart Limited* Dadart Limited Erebus Limited* UK UK UK UK UK UK UK Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Falkland Islands Ordinary shares of £1 Preference shares of £1 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% * These investments are not held by the Company but are indirect investments held through a subsidiary of the Company. Company investments in Group undertakings Balance brought forward Cost of share-based payments recognised in subsidiaries Acquisition of Momart International Limited Impairment of investment in Erebus Limited Impairment of investment in Momart International Limited Total investment in Group undertakings Company 2010 £’000 2009 £’000 31,103 43,970 194 – – – 146 2 (12,094) (921) 31,297 31,103 The Company’s investment in Erebus Limited comprises the Group’s shareholding in Falkland Oil and Gas Limited (see note 15) and a £921,000 impairment charge was recognised to reflect the fair value of the shareholding as at 31 March 2009. The Company has elected not to reverse any element of this impairment in the current year. In the prior year the Company recognised an impairment charge to its investment in Momart International Limited such that its carrying value is reduced to value-in-use (see note 11). 48 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 15 Financial assets – available-for-sale equity securities Non-current Available-for-sale equity securities 15,542 10,890 Falkland Oil and Gas Limited share price at 31 March 129.5p 72.6p – – – – Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 Available-for-sale financial assets comprise the Group’s holding of 12,000,000 ordinary shares in Falkland Oil and Gas Limited (“FOGL”) representing a 8.2% interest (2009: 15 million shares; 16.25%). The historic cost of the Group’s investment in FOGL is £1,963,000 (2009: £2,450,000). 16 Non-current assets held-for-sale Non-current assets held-for-sale Group Company 2010 £’000 20 2009 £’000 20 2010 £’000 – 2009 £’000 – Non-current assets held-for-sale comprise certain items of artwork accumulated by Momart International Limited prior to acquisition. The assets were recognised at estimated fair value on acquisition and as a result no gain or loss arose on their being classified as held for sale. 17 Other financial assets Rents receivable relate to finance leases on the sale of vehicles and customer goods. No allowances for uncollectible minimum lease payments have been deemed necessary. No contingent rents have been recognised as income in the period. No residual values accrue to the benefit of the lessor. Non-current Finance lease debtors due after more than one year Current Finance lease debtors due within one year Total other financial assets Group 2010 £’000 52 206 258 2009 £’000 58 159 217 The difference between the gross investment in the hire purchase leases and the present value of future lease payments due represents unearned finance income of £52,000 (2009: £58,000). The cost of assets acquired for the purpose of letting under hire purchase agreements by the Group during the period amounted to £309,000 (2009: £210,000). The aggregate rentals receivable during the year in respect of hire purchase agreements were £316,472 (2009: £244,000). FALKLAND ISLANDS HOLDINGS PLC 49 Group 2010 £’000 310 206 52 258 2009 £’000 275 159 58 217 Group Assets Liabilities 2010 £’000 43 – 70 105 – 57 621 896 – – 2009 £’000 49 – 52 31 114 – 516 762 – – 2010 £’000 780 1,106 – – – – – 2009 £’000 1,083 1,217 – – – – – 1,886 (896) 990 2,300 (762) 1,538 17 Other financial assets CONTINUED Gross investment in hire purchase leases Present value of future lease payments due: within 1 year after more than 1 year within 5 years 18 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Property, plant and equipment Intangible assets Inventories Other financial liabilities Interest bearing loans and borrowings Share-based payments Pension Tax assets / liabilities Net of tax assets Net tax liabilities The deferred tax asset shown as a non-current asset in the balance sheet relates to the Group’s pension scheme liabilities (see note 25). All other deferred tax assets are shown net against the non-current deferred tax liability shown in the balance sheet. Other financial liabilities Share-based payments Net tax asset Company Assets Liabilities 2010 £’000 – – – 2009 £’000 122 – 122 2010 £’000 2009 £’000 – – – – – – 50 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 18 Deferred tax assets and liabilities CONTINUED Movement in deferred tax in the year 1 April 2009 £’000 1,034 1,217 (52) (145) – (516) Recognised in income £’000 (297) (111) (18) 40 (57) 19 1,538 (424) Group Recognised Acquired in business in equity combinations £’000 £’000 – – – – – (124) (124) – – – – – – – 31 March 2010 £’000 737 1,106 (70) (105) (57) (621) 990 Property, plant and equipment Intangible assets Inventories Other financial liabilities Share-based payments Pension Deferred tax movements Unrecognised deferred tax assets A deferred tax asset of £158,000 (2009: £158,000) in respect of capital losses has not been recognised as it is not considered more likely than not that there will be suitable taxable profits in the foreseeable future from which the underlying capital losses will reverse. Other financial liabilities Share-based payments Deferred tax movements Movement in deferred tax in the prior year Property, plant and equipment Intangible assets Inventories Other financial liabilities Share-based payments Pension Deferred tax movements Company Recognised in income £’000 Recognised 31 March in equity £’000 2010 £’000 (122) – (122) – – – – – – 1 April 2009 £’000 122 – 122 Group Recognised Acquired in business in equity combinations £’000 £’000 Recognised in income £’000 120 (121) 24 (125) 22 16 (64) – – – – – (13) (13) – – – – – – – 1 April 2008 £’000 914 1,338 (76) (20) (22) (519) 1,615 31 March 2009 £’000 1,034 1,217 (52) (145) – (516) 1,538 FALKLAND ISLANDS HOLDINGS PLC 51 Company Recognised in income £’000 102 (10) 92 1 April 2008 £’000 20 10 30 Recognised 31 March in equity £’000 – – – 2009 £’000 122 – 122 Group As restated 2010 £’000 403 614 2,472 3,489 91 1,129 1,220 2009 £’000 344 – 2,226 2,570 639 – 639 4,709 3,209 18 Deferred tax assets and liabilities CONTINUED Other financial liabilities Share-based payments Deferred tax movements 19 Inventories Work-in-progress Goods-in-transit Goods for resale Trading inventories Construction-in-progress Property held-for-sale Property inventories Total inventories Goods-in-transit are retail provisions in transit to the Falkland Islands, a much lower amount was recognised in the prior year within prepayments. During the year £25,000 (2009: £79,000) of inventory write-downs has been recognised as an expense in the income statement. The Company has no inventories. 20 Trade and other receivables Non-current: Amount owed by subsidiary undertaking – – 2,916 6,325 Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 52 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 20 Trade and other receivables CONTINUED Current: Trade and other receivables Corporation tax Prepayments and accrued income Trade and other receivables 21 Cash and cash equivalents / bank overdrafts Cash and cash equivalents in the balance sheet Cash and cash equivalents in the cash flow statements Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 3,265 3,599 – 1,270 4,535 17 808 4,424 – – 15 15 Group Company 2010 £’000 3,810 3,810 2009 £’000 3,004 3,004 2010 £’000 360 360 19 – – 19 2009 £’000 289 289 22 Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group and Company’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group and Company’s exposure to interest rate and foreign currency risk, see note 28. Non-current liabilities Secured bank loans Finance lease liabilities Total non-current interest bearing loans and borrowings Current liabilities Current portion of secured bank loans Finance lease liabilities Current portion of contingent consideration on acquisition Total current interest-bearing loans and borrowings Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 3,974 81 4,055 1,128 90 – 1,218 4,988 65 5,053 500 69 1,573 2,142 3,140 3,955 – – 3,140 3,955 928 – – 928 300 – 1,573 1,873 FALKLAND ISLANDS HOLDINGS PLC 53 22 Interest-bearing loans and borrowings CONTINUED Net debt Total interest bearing loans and borrowings less: cash balances (see note 21) Net debt Finance lease liabilities Future minimum lease payments due: within one year after more than one year but within five years Total minimum lease payments due Group Company 2010 £’000 5,273 (3,810) 1,463 2009 £’000 7,195 (3,004) 4,191 2010 £’000 4,068 (360) 3,708 2009 £’000 5,828 (289) 5,539 Group Company 2010 £’000 90 81 171 2009 £’000 69 65 134 2010 £’000 2009 £’000 – – – – – – For more information regarding the maturity of the Group and Company’s interest bearing loans and borrowings see note 28. 23 Derivative financial instruments Fair value liability of derivative financial instruments Group Company 2010 £’000 – 2009 £’000 406 2010 £’000 – 2009 £’000 406 This amount represented the fair value of interest rate hedging instruments on certain of the Group’s secured bank loans prior to the liquidation of the contracts in January 2010, for more information see note 28. 24 Trade and other payables Non-current: Amount owed to subsidiary undertaking – – 871 632 Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 54 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 24 Trade and other payables CONTINUED Current: Trade payables Other creditors, including taxation and social security Accruals and deferred income Total trade and other payables Group Company 2010 £’000 2009 £’000 5,437 1,068 1,714 8,219 5,050 932 1,931 7,913 2010 £’000 – 57 356 413 2009 £’000 – 24 389 413 25 Employee benefits: pension plans The Group operates three defined contribution pension schemes. In addition it also operates two defined benefit pension schemes, both of which have been closed to new members and to future accrual. Defined contribution schemes The Group operates three defined contribution pension schemes. The pension cost charge for the year represents contributions payable by the Group to the schemes and amounted to £357,000 (2009: £403,000). The Group anticipates paying contributions amounting to £327,000 during the year ending 31 March 2011. There were no outstanding or prepaid contributions at either the beginning or end of the financial year. Defined benefit pension schemes A summary of the fair value of the net pension schemes deficit is set out below: Pension scheme deficit: Falkland Islands Company Limited Scheme Portsmouth Harbour Ferry Company Limited Scheme Deferred tax Net pension scheme deficit 2010 £’000 2009 £’000 (2,013) (224) (2,237) 621 (1,797) (239) (2,036) 516 (1,616) (1,520) FALKLAND ISLANDS HOLDINGS PLC 55 25 Employee benefits: pension plans CONTINUED 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 IAS 19 purposes to 31 March 2010 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 2010 2009 2.7% 3.0% 5.6% 3.7% 2.5% 3.0% 6.8% 3.1% The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Scheme liabilities The present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Value at 2010 £’000 Value at 2009 £’000 Value at 2008 £’000 Value at 2007 £’000 Value at 2006 £’000 Present value of scheme liabilities (2,013) (1,797) (1,863) (2,136) (2,107) Related deferred tax asset Net pension liability 558 449 465 534 527 (1,455) (1,348) (1,398) (1,602) (1,580) Movement in deficit during the year: Deficit in scheme at beginning of the year Past service cost Pensions paid Other finance cost Actuarial (loss) / gain Deficit in scheme at end of the year 2010 £’000 2009 £’000 (1,797) (1,863) – 98 (119) (195) – 135 (119) 50 (2,013) (1,797) 56 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 25 Employee benefits: pension plans CONTINUED Analysis of amounts included in other finance costs: Interest on pension scheme liabilities Analysis of amount recognised in statement of other comprehensive income: Experience gains / (losses) arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial (loss) / gain recognised in statement of comprehensive income History of experience gains and losses: 2010 £’000 (119) 2010 £’000 89 (284) (195) 2009 £’000 (119) 2009 £’000 (2) 52 50 2010 2009 2008 2007 2006 Experience gains / (losses) on scheme liabilities: Amount (£’000) 89 (2) (18) (3) 80 Percentage of year end present value of scheme liabilities 4.4% 0.10% 1.00% 0.1% 3.8% Total amount recognised in statement of total recognised gains and losses: Amount (£’000) (195) 50 301 118 57 Percentage of year end present value of scheme liabilities 9.7% (2.8)% (16.2)% (5.5)% (2.7)% FALKLAND ISLANDS HOLDINGS PLC 57 25 Employee benefits: pension plans CONTINUED 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 IAS 19 purposes as at 31 March 2006 to 31 March 2010 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 2010 2009 2008 2007 2006 3.7% 5.6% 3.7% 2.7% 6.4% 2.7% 3.7% 6.9% 3.7% 3.2% 5.4% 3.2% 3.0% 4.9% 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 The expected rates of return on the assets in the scheme were: Value at 2010 £’000 Value at 2009 £’000 Value at 2008 £’000 Value at 2007 £’000 Value at 2006 £’000 328 64 18 410 (634) (224) 63 (161) 185 50 18 253 (492) (239) 67 (172) 207 37 36 280 (477) (197) 54 (143) 156 20 34 210 (591) (381) 114 (267) 133 17 6 156 (627) (471) 142 (329) Equities Fixed interest Other Long term Long term rate of return rate of return 2010 2009 7.40% 5.60% 4.20% 6.75% 6.35% 0.50% 58 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 25 Employee benefits: pension plans CONTINUED Movement in deficit during the year: Projected benefit obligations Opening projected benefit obligations Interest thereon Distributions Experience (loss) / gain Projected benefit obligations at 31 March Plan assets Opening plan assets Distributions Contributions Return on assets Actuarial gain / (loss) Plan assets at 31 March Deficit in scheme at 31 March Analysis of amounts included in other finance costs: Expected return on pension scheme assets Interest on pension scheme liabilities Included in other finance costs Analysis of amount recognised in statement of other comprehensive income: 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 comprehensive income 2010 £’000 (493) (30) 30 (141) (634) 254 (30) 83 17 86 410 (224) 2010 £’000 17 (30) (13) 2010 £’000 86 – (141) (55) 2009 £’000 (477) (33) 4 13 (493) 280 (3) 54 22 (99) 254 (239) 2009 £’000 22 (33) (11) 2009 £’000 (99) (1) 14 (86) FALKLAND ISLANDS HOLDINGS PLC 59 25 Employee benefits: pension plans CONTINUED History of experience gains and losses Difference between the expected and actual return on scheme assets: Amount (£’000) 86 (99) 3 21.0% (39.0)% 15.8% (4) 1.0% 19 12.2% 2010 2009 2008 2007 2006 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 – – (1) 0.2% – – – – (72) (15.2)% (55) (86) 147 61 (88) scheme liabilities 8.7% 17.4% 773.7% (17.1)% (18.7)% 26 Employee benefits: share-based payments Retained earnings is used to record the costs arising under IFRS2 for options issued to Directors and employees, and similar costs associated with share-based payments. The following options were outstanding at 31 March 2010: Date of issue 27 Jul 01 10 Feb 05 14 Jun 05 14 Jun 05 18 Jun 07 5 Jul 07 7 Aug 07 4 Dec 07 3 Apr 08 30 Jul 08 8 Apr 09 15 Jul 09 9 Dec 09 Exercise price £ 1.40 5.20 4.25 4.25 3.09 2.50 3.30 3.19 3.65 3.231/4 2.071/2 2.90 3.90 Share price at grant date £ Fair value per share £ Total fair value £ Earliest exercise date Latest exercise date Not valued for IFRS2 purposes 27 Jul 04 26 Jul 11 5.20 4.25 4.25 2.83 3.021/2 3.321/2 3.40 3.75 4.00 2.071/2 2.90 3.971/2 2.47 1.66 2.14 0.82 1.08 0.73 1.19 1.31 1.35 0.56 0.72 1.45 142,499 10 Feb 08 9 Feb 15 103,750 14 Jun 08 13 Jun 15 135,950 14 Jun 08 13 Jun 15 14,350 18 Jun 10 17 Jun 17 127,289 1 Aug 10 31 Jul 17 20,087 77,350 9,906 7 Aug 10 6 Aug 17 4 Dec 10 3 Dec 17 3 Apr 11 2 Apr 18 214,948 30 Jul 11 29 Jul 18 52,278 74,952 46,400 1,019,760 8 Apr 12 7 Apr 19 15 Jul 12 14 Jul 19 9 Dec 12 8 Dec 19 Number 20,000 57,692 62,500 63,528 17,500 117,860 27,517 65,000 7,562 159,221 93,353 104,100 32,000 827,833 60 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 26 Employee benefits: share-based payments CONTINUED 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 IFRS2 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 (£) Expected volatility (%) Risk-free interest rate (%) Expected life of options (years) Dividend yield (%) Share price at grant date (£) 13 Jul 06 18 Jun 07 05 Jul 07 7 Aug 07 4 Dec 07 31 4.70 6.5 2.10 3.18 31 5.60 6.5 2.50 2.83 40 5.70 3.0 2.30 33 5.30 6.5 2.10 3.025 3.325 33 4.50 6.5 2.10 3.40 3 Apr 08 30 Jul 08 8 Apr 09 15 Jul 09 9 Dec 09 34 4.20 6.5 2.10 3.75 35 4.80 3.0 2.00 4.00 37 2.90 6.5 3.90 2.075 38 3.40 6.5 2.80 2.90 40 3.14 6.5 2.00 3.975 Share options issued without share price conditions attached have been valued using the Black-Scholes model. Share price options issued with share price conditions attached have been valued using a Monte Carlo simulation model making explicit allowance for share price targets. During the year ended 31 March 2010, 91,300 options (2009: nil) were exercised over ordinary shares. Options issued prior to 6 November 2002 are not subject to the provisions of IFRS2. The number and weighted average exercise prices of share options are as follows: Outstanding at the beginning of the year Forfeited during the year Exercised during the year Granted during the year Lapsed during the year Outstanding at the year end Vested options exerciseable at the year end Weighted average exercise price (£) 2010 3.16 3.65 1.80 2.70 3.00 3.24 4.24 Number of options 2010 890,943 (64,438) (91,300) 229,453 (136,825) 827,833 Weighted average exercise price (£) 2009 Number of options 2009 3.16 659,722 – – 3.38 3.65 3.16 – – 243,221 (12,000) 890,943 203,720 3.48 295,020 27 Capital and reserves Reconciliation of movement in capital and reserves – Group Financial assets fair value revaluation reserve £’000 Called up share capital £’000 Share premium account £’000 Other reserves £’000 906 15,996 7,206 3,145 – – – – – – – – – – (7,560) – – – – – – – – – (1,983) – – – Balance at 1 April 2008 Profit for the year Share-based payments Reserve transfer re. impairment 1 Dividends Change in fair value of available-for- sale financial assets Actuarial gain on pension, net of tax Balance at 31 March 2009 906 8,436 7,206 1,162 Profit for the year Share-based payments Deferred tax on share-based payments Dividends Issue of shares Premium on shares issued in the year, net of expenses Transfer to profit and loss on disposal of available-for-sale financial assets Change in fair value of available-for- sale financial assets Actuarial loss on pension, net of tax Repurchase of equity interest – – – – 4 – – – – – – – – – – – (1,683) 6,828 – – Balance at 31 March 2010 910 13,581 – – – – – 10 – – – 108 7,324 – – – – – – – – – – FALKLAND ISLANDS HOLDINGS PLC 61 Retained earnings £’000 6,775 (1,153) 297 1,983 (722) – (23) 7,157 5,256 240 – Total equity £’000 34,028 (1,153) 297 – (722) (7,560) (23) 24,867 5,256 240 – (1,084) (1,084) – – – – (126) (183) 4 10 (1,683) 6,828 (126) (75) 1,162 11,260 34,237 1 The premium on shares issues in March 2008 in connection with the acquisition of Momart Limited was credited to other reserves. In 2009 the Group recognised an impairment charge of £1,983,000 in relation to goodwill arising on the Momart acquisition. As a result the Group has made a transfer from other reserves to retained earnings of an amount equal to the impairment recognised. The transfer neutralises the impact of the impairment charge recognised on retained earnings reserves. 62 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 27 Capital and reserves CONTINUED Reconciliation of movement in capital and reserves – Company Balance at 1 April 2008 Loss for the year Reserve transfer re. impairment Share-based payments Dividends Balance at 31 March 2009 Loss for the year Reserve transfer re. impairment Share-based payments Deferred tax on share-based payments Dividends Issue of shares Premium on shares issued in the year, net of expenses Repurchase of equity interest Balance at 31 March 2010 Called up share capital £’000 906 – – – – Share premium account £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 7,206 7,831 25,648 41,591 – – – – – (10,625) (10,625) (921) – – 921 297 (722) – 297 (722) 906 7,206 6,910 15,519 30,541 – – – – – 4 – – – – – – – – 10 108 – – – – – – – – (330) (330) – 240 – – 240 – (1,084) (1,084) – – (183) 4 10 (75) 910 7,324 6,910 14,162 29,306 A loss of £330,000 (2009: loss £10,625,000) has been dealt with in the accounts of the Parent Company. As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account. Of the loss of £10,625,000 dealt with in the accounts of the Company in the prior year, £921,000 arose on recognition of an impairment in the Company’s investment in Momart International Limited. The premium on shares issues in March 2008 in connection with the acquisition of Momart International Limited was credited to other reserves. As a result the Company has made a transfer from other reserves to retained earnings of an amount equal to the impairment recognised. The transfer neutralises the impact of the impairment charge on retained earnings reserves. 27 Capital and reserves CONTINUED Share capital On issue at 1 April Issued for cash On issue at 31 March – fully paid Authorised Ordinary shares of 10p each Allotted, called up and fully paid Ordinary shares of 10p each FALKLAND ISLANDS HOLDINGS PLC 63 Ordinary shares 2010 2009 9,060,796 9,060,796 36,382 – 9,097,178 9,060,796 2010 £’000 2009 £’000 1,250 1,250 910 910 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. On 31 March 2000, an Employee Share Ownership Plan was established. At 31 March 2010 the plan held 36,499 (2009: 36,499) ordinary shares at a cost of £68,542 (2009: £68,542). The market value of the shares at 31 March 2010 was £122,418 (2008: £77,013). Shares held in the ESOP have had their rights to dividends waived, as in prior years. There were 227,081 (2009: 313,217) share options outstanding under the Company’s Saving Related Share Option Scheme (“Save As You Earn”) at 31 March 2010. For more information on share options please see note 26. Dividends The following dividends were recognised in the period: Final: 8.0p (2009 Final: 8.0p) per qualifying ordinary share Interim: 4.0p (2009 Interim: nil) per qualifying ordinary share 2010 £’000 723 361 1,084 2009 £’000 722 – 722 After the balance sheet date a final dividends of 5.0p (£451,000) per qualifying ordinary share (2009: 8.0p) (£722,000) were proposed by the Directors. The dividends have not been provided for. 64 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 28 Financial instruments (i) Fair values of financial instruments Investments in equity securities The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the balance sheet date. Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. Trade and other payables The fair value of trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. Cash and cash equivalents The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. Where it is not repayable on demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date. Interest-bearing borrowings Fair value, which after initial recognition is determined for disclosure purposes only, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date. Derivative financial instruments The fair value of derivative financial instruments is determined by their market value at the reporting date. IAS 39 categories and fair values The fair values of financial assets and financial liabilities are not materially different to the carrying values shown in the consolidated balance sheet and Company balance sheet. The following table shows the carrying value for each category of financial instrument: Group Company 2010 £’000 2009 £’000 Available-for-sale financial assets at fair value 15,542 10,890 Financial liabilities at amortised cost Interest bearing borrowings at amortised cost Derivative financial instruments Trade and other receivables (8,219) (5,273) – 4,535 (7,913) (7,195) (406) 4,424 2010 £’000 – (414) (4,068) – 15 2009 £’000 – (412) (5,828) (406) 19 (ii) Credit risk Financial risk management Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. Group The Group’s credit risk is primarily attributable to its trade receivables. The maximum credit risk exposure of the Group comprises the amounts presented in the balance sheet, which are stated net of provisions for doubtful debt. A provision is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of future cash flows. Management has credit policies in place to manage risk on an ongoing basis. These include the use of customer specific credit limits. FALKLAND ISLANDS HOLDINGS PLC 65 28 Financial instruments CONTINUED Company The majority of the Company’s receivables are with subsidiaries. The Company does not consider these counter-parties to be a significant credit risk. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. Therefore, the maximum exposure to credit risk at the balance sheet date was £8,828,000 (2009: £7,645,000) being the total trade receivables, other financial assets and cash and cash equivalents in the balance sheet. The maximum exposure to credit risk for trade receivables at the balance sheet date by geographic region was: Falkland Islands Europe North America United Kingdom Other Trade receivables The Company has no trade debtors. Credit quality of financial assets and impairment losses Group Not past due Past due 0 – 30 days Past due 31 – 120 days More than 120 days Gross 2010 £’000 Impairment 2010 £’000 1,735 1,194 263 198 3,390 – – – 125 125 Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 1,413 1,413 187 261 1,232 172 3,265 Net 2010 £’000 1,735 1,194 263 73 466 247 1,418 55 3,599 Gross 2009 £’000 1,988 832 444 508 3,265 3,772 – – – – – – Impairment 2009 £’000 – – – 173 173 – – – – – – Net 2009 £’000 1,988 832 444 335 3,599 The movement in the allowances for impairment in respect of trade receivables during the year was: Balance at 1 April 2009 Impairment loss recognised Impairment loss reversed Balance at 31 March 2010 Group Company 2010 £’000 173 – (48) 125 2009 £’000 82 136 (45) 173 2010 £’000 2009 £’000 – – – – – – – – 66 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 28 Financial instruments CONTINUED The allowance account for trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly. No further analysis has been provided for cash and cash equivalents, trade receivables from group companies, other receivables and other financial assets as there is limited exposure to credit risk and no provisions for impairment have been recognised. (iii) Liquidity risk Financial risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Group and Company At the beginning of the period the Group had outstanding bank loans of £5.5 million and unsecured loan note commitments of £1.6 million. All payments due during the year with respect to these agreements were met as they fell due. The Group continues to maintain a £2.0 million Revolving Credit facility to fund working capital requirements which was undrawn at the year end. The Group manages its cash balances centrally at head office and prepares rolling cash flow forecasts to ensure funds are available to meets its secured and unsecured commitments as and when they fall due. Liquidity risk – Group The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of netting agreements: 2010 Non-derivative financial instruments Secured bank loans Finance leases Trade and other payables Carrying amount £’000 5,102 171 8,219 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 5,596 171 8,219 1,347 1,147 2,192 – 8,219 9,566 – – – – 1,147 2,192 13,492 13,986 2009 Non-derivative financial instruments Secured bank loans Finance leases Contingent consideration Trade and other payables Carrying amount £’000 5,488 134 1,573 7,913 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 6,304 134 1,615 7,913 773 69 1,615 7,913 1,236 3,377 918 65 – – – – – – – – 15,108 15,966 10,370 1,301 3,377 918 5 years and over £’000 910 – – 910 5 years and over £’000 FALKLAND ISLANDS HOLDINGS PLC 67 28 Financial instruments CONTINUED Liquidity risk – Company The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of netting agreements: Carrying amount £’000 4,068 413 4,481 Carrying amount £’000 4,255 1,573 413 6,241 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 4,591 413 5,004 1,119 413 1,532 919 – 919 1,736 – 1,736 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 4,986 1,615 413 7,014 524 1,615 413 2,552 991 2,655 – – – – 991 2,655 5 years and over £’000 817 – 817 5 years and over £’000 816 – – 816 2010 Non-derivative financial instruments Secured bank loans Trade and other payables 2009 Non-derivative financial instruments Secured bank loans Contingent consideration Trade and other payables (iv) Market risk Financial risk management Market risk is the risk that changes in market prices, such as foreign exchange, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. 68 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 28 Financial instruments CONTINUED Market risk – Foreign currency risk The Group has exposure to foreign currency risk arising from trade and other payables which are denominated in foreign currencies. The Group is not, however, exposed to any significant transactional foreign currency risk. The Group’s exposure to foreign currency risk is as follows. This is based on carrying amounts for monetary financial instruments. Group 31 March 2010 Cash and cash equivalents Trade payables and other payables Balance sheet exposure Group 31 March 2009 Cash and cash equivalents Trade payables and other payables Balance sheet exposure EUR £’000 179 (385) (206) EUR £’000 30 (980) (950) USD £’000 204 (336) (132) USD £’000 201 (309) (108) Other £’000 1 (161) (160) Other £’000 – (144) (144) Total £’000 384 (882) (498) Total £’000 231 (1,433) (1,202) The Company has no exposure to foreign currency risk. Sensitivity analysis Group A 10% weakening of the following currencies against the pound sterling at 31 March would have increased / (decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant and is performed on the same basis for the year ended 31 March 2009. EUR USD Equity Profit or loss 2010 £’000 56 54 2009 £’000 101 51 2010 £’000 56 54 2009 £’000 101 51 A 10% strengthening of the above currencies against the pound sterling at 31 March would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. FALKLAND ISLANDS HOLDINGS PLC 69 28 Financial instruments CONTINUED Market risk – interest rate risk Profile At the balance sheet date the interest rate profile for the Group’s interest-bearing financial instruments was: Fixed rate financial instruments: Finance leases receivable Finance leases payable Contingent consideration Variable rate financial instruments: Derivative financial instruments Financial liabilities Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 258 (171) – 87 – (5,102) (5,102) 217 (134) (1,573) (1,490) (406) (5,488) (5,894) – – – – – (4,068) (4,068) – – (1,573) (1,573) (406) (5,828) (6,234) The Group has a loan of £1.0 million (2009: £1.2 million) in respect of the ferry delivered in 2005. The loan is repayable over a 10 year period from June 2005 and bears interest at 1.4% above the base rate. The loan was previously hedged with an base rate cap of 6.5% and a base rate floor of 4.25%. On 13 January 2010 the Group liquidated this base rate cap and floor at a cost of £68,000. At 31 March 2009 the fair value of both these contracts was a liability of £65,000. The Group has a further loan of £4 million in respect of the acquisition of Momart International Limited. The loan is repayable over five years commencing in June 2010 and bears interest at 2% above the base rate. The loan was previously hedged with a base rate cap of 6.25% and a base rate floor of 4.25%. On 13 January 2010 the Group liquidated this base rate cap and base rate floor at a cost of £284,000. At 31 March 2009 the fair value of both these instruments was a liability of £342,000. Sensitivity analysis A change of 100 basis points in interest rates at the balance sheet date would have increased / (decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. 70 ANNUAL REPORT 2010 Notes to the Financial Statements CONTINUED 28 Financial instruments CONTINUED This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect of financial instruments with variable interest rates, financial instrument at fair value through profit or loss or available for sale with fixed interest rates and the fixed rate element of interest rate swaps. The analysis is performed on the same basis for 31 March 2009. Equity: Increase Decrease Profit or loss: Increase Decrease Market risk – equity price risk Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 – (51) – (51) – (14) – (14) – (41) – (41) – (4) – (4) The Group’s and Company’s exposure to equity price risk arises from its investments in equity securities which are classified as available- for-sale financial assets and are shown in the balance sheet as other financial assets (see note 15). Sensitivity analysis The Group’s available-for-sale financial assets comprise its investment in Falklands Oil and Gas Limited. During the year ended 31 March 2010 Falklands Oil and Gas Limited shares traded on the AIM market of the London Stock Exchange at an average price of 115.9p with a high of 177.25p and a low of 63.35p. Based upon this share price history the value of available-for-sale financial assets held at the balance sheet date could have varied between a low of £7,602,000 (2009: £7,995,000) and a high of £21,270,000 (2009: £24,750,000). (v) Capital Management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits to other stakeholders. 29 Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Group 2010 £’000 664 2,512 4,038 7,214 2009 £’000 662 2,516 4,661 7,839 The Group leases three office premises and a number of storage warehouses under operating leases. Office leases typically run for a period of 3 years, with an option to renew the lease after that date. Warehouse leases typically run for a period of 25 years, with an option to renew the lease after that date. FALKLAND ISLANDS HOLDINGS PLC 71 29 Operating leases CONTINUED Group During the year £649,000 was recognised as an expense in the income statement in respect of operating leases (2009: £594,000). The Company had no operating lease commitments. 30 Capital commitments At the end of the year the Group had no capital commitments not provided for in these financial statements. 31 Related parties The Group has a related party relationship with its subsidiaries (see note 14) and with its directors and executive officers. Directors of the Company and their immediate relatives control 1.1% per cent of the voting shares of the Company. The compensation of key management personnel (including directors) is as follows: Group Company Key management emoluments including social security costs Company contributions to money purchase pension plans Other post employment benefits Share-related awards 2010 £’000 1,282 209 – 79 2009 £’000 1,043 219 – 154 Total key management personnel compensation 1,570 1,416 2010 £’000 573 25 – 49 647 2009 £’000 445 25 – 143 613 32 Accounting estimates and judgements The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based upon historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements as to asset and liability carrying values which are not readily apparent from other sources. Actual results may vary from these estimates, and taken into account in periodic reviews of the application of such estimates and assumptions. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Actuarial assumptions have been used to value the defined benefit pension liability. Management have selected these assumptions from a range of possible options following consultations with independent actuarial advisors. Impairment tests have been undertaken with respect to intangible assets (see note 11 for further details) using commercial judgment and a number of assumptions and estimates have been made to support their carrying amounts. In determining the fair value of intangible assets recognised on the acquisition of Momart International Limited management acted after consultation with independent intangible asset valuation advisors. 72 ANNUAL REPORT 2010 Directors and Corporate Information Directors David Hudd Chairman Registered Office Kenburgh Court, John Foster Managing Director 133-137 South Street, Bishop’s Stortford, Hertfordshire CM23 3HX 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 Financial PR Financial Dynamics Holborn Gate, 26 Southampton Buildings, London WC2A 1PB Mike Killingley* Jeremy Brade* *Non-executive Directors Company Secretary James Ivins Corporate Information Stockbroker and Nominated Adviser Altium 30 St. James’s Square, London SW1Y 4AZ 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 Northern House, Woodsome Park, Fenay Bridge, Huddersfield HD8 0GA Senior Staff Senior Staff Senior Staff in the Falkland Islands at Portsmouth Harbour Ferry Company at Momart Limited Roger Spink Director and General Manager Paul Fuller Director and General Manager Eugene Boyle Managing Director Telephone: 00 500 27600 Email: fic@horizon.co.uk Telephone: 023 9252 4551 Telephone: 020 7426 3000 Email: admin@gosportferry.co.uk Email: enquiries@momart.co.uk Website: www.the-falkland-islands-co.com Website: www.gosportferry.co.uk Website: www.momart.co.uk www.fihplc.com 

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