Horizon Gold Limited
Annual Report 2010

Plain-text annual report

Annual Report & Accounts FOR THE YEAR ENDED 31 MARCH 2010 H O R N B Y P L C A n n u a l R e p o r t & A c c o u n t s 2 0 1 0 Hornby PLC Westwood, Margate, Kent CT9 4JX www.hornby.com Contents Financial Highlights Chairman’s Statement Chief Executive’s Report Directors and Corporate Information Directors’ Report Corporate Governance Statement 1 2 4 8 9 13 19 Directors’ Remuneration Report 25 26 Statement of Directors’ Responsibilities Independent Auditors’ Report to the Members of Hornby Plc Group and Company Statement of Comprehensive Income 28 29 Group and Company Balance Sheet 30 Statement of Changes in Equity 31 Group and Company Cash Flow Statement 32 Notes to the Cash Flow Statement 33 Notes to the Financial Statements 69 Notice of Annual General Meeting 72 Five Year Summary SHAREHOLDERS’ INFORMATION SERVICE HORNBY WELCOMES CONTACT WITH ITS SHAREHOLDERS. IF YOU HAVE QUESTIONS OR ENQUIRIES ABOUT THE GROUP OR ITS PRODUCTS, PLEASE CONTACT: A J MORRIS, FINANCE DIRECTOR HORNBY PLC WESTWOOD MARGATE KENT CT9 4JX Financial Highlights • Revenue up by 5% to £64.7m • Underlying operating profit down 9% to £6.5m • Underlying profit before taxation down 10% to £5.7m • Tax charge down from 31.2% to 29.3% • Net debt down from £11.8m to £3.2m • Final dividend per share 5.0p Revenue Underlying*: Operating profit Profit before taxation Profit after taxation Basic earnings per share Reported: Operating profit Profit before taxation Profit after taxation Basic earnings per share (pence) Net debt Total dividend per share (pence) 2010 £’000 64,736 6,497 5,708 4,151 11.0 6,004 5,215 3,685 % 5% 2009 £’000 61,569 (9%) (10%) (8%) (8%) (13%) (15%) (13%) 7,109 6,331 4,498 11.9 6,899 6,121 4,212 9.8 (3,154) (13%) (73%) 11.2 (11,760) 5.0 85% 2.7 * Underlying figures are before amortisation of intangibles, net foreign exchange adjustments on intercompany loans, abortive due diligence and restructuring costs. 2 0 1 0 2 0 0 9 2 0 0 8 2 0 0 7 2 0 0 6 2 0 0 9 2 0 1 0 2 0 0 8 2 0 0 7 2 0 0 6 2 0 0 8 2 0 0 7 2 0 0 6 2 0 1 0 2 0 0 9 REVENUE £’000 UNDERLYING PROFIT BEFORE £’000 DIVIDEND PER SHARE £’000 HORNBY PLC Annual Report & Accounts 2010 1 Chairman’s Statement The Group is emerging from a difficult trading period in sound financial health. The Board is pleased with the performance of the Group which gives us renewed confidence for the future. The Group now has significantly improved prospects for future growth. Introduction Over the past year we experienced challenging conditions, with adverse hedged exchange rates from rates achieved in 2009 between Sterling and the Hong Kong Dollar, the currency in which most of our purchases are made. We also experienced, in the early part of the period under review, heavy de-stocking amongst our UK retailers and International distributors. Consumer demand for our products during the year continued to be strong. This demonstrated once again the resilience of our portfolio of hobby-based brands in times of economic uncertainty. The very solid sell-through of our products prior to Christmas 2009 resulted in lower levels of inventory within the Group and amongst our customers. This, coupled with new, creative product innovation, has resulted in increased order intake since the beginning of January 2010, and a resilient finish to our financial year ended 31 March 2010. Throughout the course of the year, we have maintained a close and positive relationship with our largest supplier in China. We have also diversified our sourcing successfully, particularly of model railway products, in order to reduce our overall dependency on a single supplier. Results Against a difficult economic background in most of our markets, sales grew by 5% to £64.7 million (2009 – £61.6 million). The first half sales increase of 5% was maintained in the second half against a strong prior year performance (when sales were 20% up on 2008). The UK in particular had an encouraging second half, reflecting buoyant demand in the pre-Christmas period. Sales by our Continental European subsidiaries were more muted in the second half. This reflected in part, the continuing recession, in particular in Spain. With this in mind, following the strong UK performance pre-Christmas, we took the decision to prioritise UK supplies in the final quarter of the financial year in order to refill the product pipeline as quickly as possible. Pre-tax profit before amortisation of intangibles and net foreign exchange adjustments on intercompany loans (hereafter referred to as underlying pre- tax profits) was £5.7 million (2009 – £6.3 million) (see note 1). Basic earnings per share calculated on underlying pre-tax profit (hereafter referred to as underlying basic earnings per share) were 10.99p (2009 – 11.92p). Statutory pre-tax profit was £5.2 million (2009 – £6.1 million) and statutory basic earnings per share were 9.76p (2009 – 11.17p). Cash generation was strong, which has enabled the Group to bring down debt levels considerably. Net debt as at 31 March 2010 was £3.2 million (2009 – £11.8 million). Dividend In view of the excellent progress that has been made in reducing Group borrowings and the improved prospects for growth, the Board is pleased to recommend a dividend for the year of 5.0p per ordinary share (2009 – 2.7p). This will be paid on 20 August 2010 to shareholders on the register at 16 July 2010. 2 HORNBY PLC Annual Report & Accounts 2010 Our supply chain is now more diversified, thus reducing the risk of product shortages. Given the strong start we have made to the new financial year in terms of order intake across the Group, we look forward with renewed confidence to the short and medium term. Finally, I would like to thank our Chief Executive Frank Martin and through him, all our staff, for their continuing commitment to growing the business, and ensuring that future return to shareholders is maximised. Neil Johnson Chairman 4 June 2010 Banking Facilities The Group continues to have access to secured banking facilities of £21.5 million in the UK. These facilities comprise an £11.5 million amortising Term Loan which expires in July 2014 and a £10.0 million Secured Money Market Loan with an unexpired term of more than two years. Borrowings in the year ended 31 March 2010 peaked at £16.0 million. The Group remained within all of its covenants comfortably during the year. Product Development Our product development programme continues to be a key driver of our business. We continue to increase our resources in this area in order to cope with the additional demands of our subsidiaries and the increase in product categories. Outlook Over recent years the Group has built a formidable portfolio of premier hobby brands such as Corgi, Airfix, Lima, Rivarossi and Jouef, in addition to Hornby and Scalextric. During the past year it has become clear that to survive and thrive in our markets such brand strength is essential. We have also seen how we have been able to leverage the strength of our brands in securing licenses with Disney/ Pixar, the McLaren and Mercedes Formula One teams and perhaps most significantly the London 2012 Olympic and Paralympic Games. This latter relationship will, we believe, begin to have a significant positive impact on our performance in the financial year to 31 March 2012 and of course during the following financial year to March 2013. However, we are already seeing significant interest in our existing and proposed London 2012 product ranges both from retailers and consumers. HORNBY PLC Annual Report & Accounts 2010 3 Chief Executive’s Report The Group’s principal business is the development, production and supply of hobby and toy products. The Group distributes its products through a network of specialist and multiple retailers throughout the UK and overseas. The Group markets its products under a number of brands well known in their respective markets. These brands include Hornby, Scalextric, Electrotren, Lima, Jouef, Rivarossi, Arnold, Airfix, Humbrol and Corgi. Financial Review Consolidated revenue for the year ended 31 March 2010 was £64.7 million, an increase of 5% compared to the previous year’s £61.6 million. Underlying profit before tax margin* Reported profit before tax margin Underlying basic earnings per share* Statutory basic earnings per share 2010 2009 8.8% 10.3% 8.1% 9.9% 10.99p 11.92p 9.76p 11.17p * Stated before amortisation of intangibles and net foreign exchange adjustments on intercompany loans Reported full year gross profit margin was 49.6% (2009 – 47.8%), which does not take into account the impact of margin related hedged foreign exchange transaction gains and losses that are required to be reported within operating income / expense. The adjusted gross profit margin after incorporating net exchange losses was 48.4% (2009 – 49.7% after incorporating net exchange gains). The reduction in adjusted gross profit margin was primarily a result of higher product costs and adverse foreign exchange movements between Sterling and the Hong Kong Dollar hedge rate. We were able to mitigate some of the adverse currency effects by increasing our prices, but chose not to raise prices to a level at which market demand would be compromised. Net debt at 31 March 2010 was £3.2 million compared with £11.8 million at 31 March 2009. The reduction of £8.6 million reflected profit attributable to equity holders (which was not impacted by dividend payments this year) and lower working capital. In particular, inventories reduced by £2.1 million compared to a year earlier. Expenditure on product development and capital projects continued and this investment will result in increased sales and margins in the new financial year and beyond. In particular, the development of a lower priced entry level Scalextric “Start” system will, we believe, provide the Group with a powerful competitive advantage in the 1:32 slot car market. Hornby produces the majority of its products in China and India, via third-party contract manufacturers. Some packing operations remain in the UK where this strategy provides greater flexibility in meeting market needs. The problems the Group has faced in respect of its largest supplier in China have been referred to previously. Over the course of the past year we have brought on stream two alternative suppliers of model railway products. This reduces our dependence on our largest supplier and provides more flexibility to increase production volumes if required. We continue to work closely with our largest supplier and expect that this relationship will continue to the benefit of both parties, for many years to come. 4 HORNBY PLC Annual Report & Accounts 2010 All purchases from our Chinese suppliers are either in US or Hong Kong Dollars. It is the Group’s policy to enter into forward currency contracts in anticipation of purchases for up to 12 months in the future. During the year to March 2010 we experienced exchange rates substantially less favourable than during the year to March 2009 as the hedged rates were worse in 2010 than 2009. This has had a negative effect on our earnings for the year to March 2010. For the year to March 2011 we have secured a substantial portion of our currency requirements by means of forward currency contracts at more favourable rates than full year 2010. The Group retains intellectual property rights in its products and controls all sales of its products. United Kingdom UK retailers continued to de-stock during the first half of the financial year but by Christmas the continued demand for our products from consumers resulted in a late surge in orders and deliveries to our retailers. This positive trend continued after Christmas into the final quarter of our financial year, resulting in sales for the full year 7% above the previous year at £46.5 million (2009 £43.5 million). However, primarily as a result of the negative effects of foreign exchange on our product costs, underlying profit before tax fell to £4.8 million compared to £5.9 million the previous year. Reported profit before tax was £4.4 million (2009 – £5.9 million). This result includes export sales to third parties of £5.7 million (2009 – £5.2 million). Sales via our independent retail channel were in line with the previous year whilst sales via our network of concessions showed encouraging growth. Whilst our major retailers performed well immediately prior to Christmas, the effects of destocking earlier in the year resulted in sales just slightly above the previous year. It is now clear that our larger retail customers recognise that they failed to fulfil their sales potential in 2009. We are now receiving much stronger indications of commitment from these retailers for the new financial year. Sales of Hornby model railways were slightly lower than the previous year due to retailer destocking. Order intake since January 2010 has been strong, bolstered by product innovations including the Disney/ Pixar Toy Story 3 film–related train set. We are expecting a healthy growth in Hornby model railway sales in the new financial year. Sales of Scalextric were ahead of the previous year. For the new financial year Scalextric will also benefit from the Disney /Pixar Toy Story 3 franchise as we will be producing Micro Scalextric sets based on the film. This will build on our highly successful “Cars” movie–related Scalextric merchandise launched in 2009. Sales of both Airfix and Corgi were substantially ahead of the previous year as we continue to rebuild product development and sales momentum in these HORNBY PLC Annual Report & Accounts 2010 5 Chief Executive's Report (continued) on sales of £15.5 million, compared with an underlying profit before tax of £0.4 million in the previous year on sales of £14.8 million. Reported profit before tax was £0.9 million (2009 – £0.3 million). Our strong European brands continue to attract increasing support from the model railway communities in each of our key territories. The product development initiatives with Disney/Pixar in model railways will also have a positive effect on sales in mainland Europe. America Sales in Hornby America were lower at $4.4 million (2009 – $5.6 million), producing a loss before tax of $(90,000) (2009 – profit $13,000). Upon translation into Sterling, due to the stronger US dollar, sales were £2.8 million (2009 – £3.3 million) with a loss before tax of £(57,000) (2009 – profit £8,000). However, Hornby Hobbies in the UK benefits from a gross margin contribution of £398,000 (2009 – £565,000) generated on sales made to Hornby America, which has the effect of increasing significantly the overall contribution to Group profit of our US operation. The US market remains difficult, and whilst this persists, the focus for Hornby America will continue to be on overhead control and working capital management. In this respect, inventories in Hornby America were 23% lower at 31 March 2010 compared to a year previously. iconic brands. The launch of the widely acclaimed 1:24 scale Airfix Mosquito kit has set a new standard of quality and detail in model kits. This has helped to provide a focal point for the regeneration of Airfix sales. In Corgi the process of re-investment continues. The introduction of an orderly release programme for new models across the year has encouraged previous customers to recommence their collections and has attracted new collectors to the brand. The strength in depth of our product and brand portfolio has stood us in good stead in difficult economic times and Hornby is now in an excellent position to continue to build on this strong position, at the expense of our competitors who have a much narrower product and market focus. Continental Europe Overall, our subsidiaries in mainland Europe recorded sales ahead of the prior year, although there were significant differences in performance between the individual markets. Italy had an excellent year, recording sales of £5.5 million, 24% up on the previous year. The remaining subsidiaries in Europe (Spain, France and Germany) recorded sales slightly below the previous year, due in part to the general economic climate, particularly in Spain, and also to the prioritisation of production to fulfil UK requirements towards the end of the financial year. All European subsidiaries enter the new financial year with order intake levels well ahead of the previous year. Hornby Italy reported a profit before tax for the year of £0.6 million compared to a loss of £(0.1) million in the previous year. In total, our subsidiaries in mainland Europe contributed an underlying profit before tax higher than the year before at £1.0 million 6 HORNBY PLC Annual Report & Accounts 2010 Outlook In my report last year I said that we expected to grow sales despite the difficult economic environment. We have achieved sales growth and, based on our current levels of order intake, we are forecasting a significant further increase in sales in the new financial year. I also said a year ago that we would lay the foundations for significantly stronger financial performance in future years. Each of our core brands is expected to show substantial growth this year. Our subsidiaries in Continental Europe are all expected to deliver further improvements in performance. We now have the brands, the products and the distribution network required to grow consistently over the coming years. Frank Martin 4 June 2010 London 2012 Olympic and Paralympic games We are pleased to have secured a wide range of product rights related to the 2012 London Olympic and Paralympic games. The first mass market products related to the London 2012 games have been released in recent weeks and we are delighted with the initial rates of sale. We have recently appointed a Project Director to manage our London 2012 product development and marketing. Our London 2012 products will be drawn from across our brand portfolio and it is therefore important to ensure that the range is presented as a cohesive proposition to retailers and consumers, whilst ensuring that the core brand ranges are not neglected as the London 2012 momentum builds over the coming two years. During 2010 we will be launching a wide selection of products based on the London 2012 Olympic and Paralympic games. Price points will range from below £5 for collectable Corgi vehicles to over £100 for limited edition Hornby train sets. We expect that sales of our die cast replicas of the two London 2012 mascots will be particularly popular. We believe that the London Olympics will provide a significant opportunity to drive incremental sales and profits over the next two years. We also believe that there is clear potential to open additional channels of distribution which will continue to provide incremental sales opportunities for our core business after the games have finished. HORNBY PLC Annual Report & Accounts 2010 7 Directors and Corporate Information DIRECTORS N A Johnson Non-Executive Chairman F Martin Chief Executive A J Morris Finance Director N M Carrington Non-Executive Director M E Rolfe Non-Executive Director SECRETARY J W Stansfield REGISTERED OFFICE Westwood Margate Kent CT9 4JX COMPANY REGISTERED NUMBER Registered in England No. 01547390 AUDITORS PricewaterhouseCoopers LLP First Point Buckingham Gate Gatwick RH6 0PP SOLICITORS Berwin Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA PRINCIPAL BANKERS Barclays Bank PLC 9 St George’s Street Canterbury Kent CT1 2JX FINANCIAL ADVISERS AND BROKERS Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT REGISTRARS AND TRANSFER AGENTS Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0GA 8 HORNBY PLC Annual Report & Accounts 2010 Directors' Report The directors submit their Annual Report together with the audited financial statements for the year ended 31 March 2010. PRINCIPAL ACTIVITIES The Company is a holding company registered in England No. 01547390 with a Spanish branch and has six operating subsidiaries: Hornby Hobbies Limited in the United Kingdom, Hornby America Inc. in the USA, Hornby España S.A. in Spain, Hornby Italia s.r.l. in Italy, Hornby France S.A.S. in France and Hornby Deutschland GmbH in Germany. Hornby Plc is a public limited company incorporated and operating in the United Kingdom. Its registered office is set out on page 8. The Group is principally engaged in the development, design, sourcing and distribution of hobby and interactive home entertainment products. BUSINESS REVIEW The Group’s business review is included in the ‘Results’ section of the Chairman’s Statement, and the ‘Financial review’ section in the Chief Executive’s Report. Future developments are included both in the ‘Outlook’ section of the Chairman’s Statement and the ‘Outlook’ section in the Chief Executive’s Report. The principal business risks and uncertainties facing the Group are set out in the Corporate Governance Statement on pages 16 and 17. RESULTS AND DIVIDENDS The results for the year ended 31 March 2010 are set out in the Group Statement of Comprehensive Income on page 28. Revenue for the year was £64.7 million compared to £61.6 million last year. The profit for the year attributable to equity holders amounted to £3.7 million (2009 – £4.2 million). The position of the Group is set out in the Group Balance Sheet on page 29. No interim dividend was declared in the year (2009 – 2.7p per ordinary share amounting to £1,018,136). The directors recommend a final dividend of 5.0p (2009 – nil) per ordinary share amounting to £1,903,205 (2009 – £nil) payable on 20 August 2010 to those shareholders on the Register at 16 July 2010. This represents a total dividend paid in respect of the year ended 31 March 2010 of 5.0p per ordinary share (2009 – 2.7p). KEY PERFORMANCE INDICATORS (KPIs) The directors are of the opinion that the KPIs are revenues, gross margins, underlying profit before tax, earnings per share and cash generation, the information for which is available in these financial statements and summarised on the financial highlights section at the beginning of this report. The Group maintains a robust planning system with individual targets for subsidiaries in terms of growth and profits. The Board monitors progress against plan on a regular basis adjusting future objectives annually in line with current circumstances. RESEARCH & DEVELOPMENT The Board considers that research and development into new products continues to play an important role in the Group’s success. All costs incurred in the year have been charged to the Statement of Comprehensive Income and are as set out in note 4. PROPERTY VALUES In the opinion of the directors, and given current planning use approvals, there is no significant difference between the book amount and the current market value of interests in land and buildings. Land and buildings are valued according to the provisions of IAS 16’s cost model. Assets are carried at cost less accumulated depreciation and impairment. CHARITABLE DONATIONS During the year the Group made donations of £20,200 (2009 – £21,635) for charitable purposes to include the Theatre Royal Margate (£20,000). There were no political donations in the year (2009 – £nil). DIRECTORS The persons who were directors during the year are listed below: Neil A Johnson, aged 61, was originally appointed a non- executive director on 1 July 1998. On 22 December 2000 he assumed the responsibilities of Chairman. He is currently a member of the Metropolitan Police Authority. Neil served for five years as a member of the Prime Minister’s Advisory Panel for the Citizen’s Charter. He is a member of a number of private company Boards and Trusts, Chairman of Motability Operations Group Plc and on 19 October 2009 Mr Johnson was appointed Chairman of Umeco Plc. Frank Martin, aged 58, was appointed Chief Executive on 3 January 2001. Frank was previously Chief Executive of HORNBY PLC Annual Report & Accounts 2010 9 Directors' Report (continued) Humbrol Limited, and formerly Managing Director of Denby Pottery Limited and Group Marketing Director of Hasbro (UK) Limited. His conditions of employment include a notice period of one year to be given by the Company and of six months to be given by him. SUBSTANTIAL SHAREHOLDINGS The Company has been notified that at close of business on 28 May 2010 the following parties were interested in three per cent or more of the Company’s ordinary share capital. Andrew J Morris, aged 47, was appointed Group Finance Director on 26 November 2007. Andrew was previously CFO of Speedo International and formerly Finance Director, Africa Glaxo Smithkline plc. His conditions of employment include a notice period of one year to be given by the Company and of six months to be given by him. Nigel M Carrington, aged 54, was appointed a non-executive director on 1 December 2007. Nigel is currently Rector of University of the Arts London and a member of the board of a number of charities. He was formerly a corporate lawyer and Managing Partner at Baker & McKenzie and Managing Director and Deputy Chairman of McLaren Group Limited. Mark E Rolfe, aged 51, was appointed a non-executive director on 1 January 2008. After qualifying as a chartered accountant with Coopers and Lybrand, Mark joined Gallaher Group plc in 1986, where he was Finance Director for seven years retiring in 2007. He is a non-executive director of The Sage Group Plc and Barratt Developments Plc, and Chairman of Lane Clark & Peacock LLP. The interests of the directors in the shares of the Company and in options granted over such shares are disclosed in the Directors’ Remuneration Report on pages 22 to 24. The number of Board meetings held during the year and attendance by the directors is set out on page 13. DIRECTORS’ INDEMNITIES The Company maintains liability insurance for its directors and officers. The Company has also provided an indemnity for its directors and the secretary, which is a qualifying third party indemnity provision for the purposes of the Companies Act 2006. Shareholder Phoenix Asset Management Partners Limited P J Wood Electra Quoted Partners Aberdeen Asset Management Legal & General Investment Management J J Hosking Number of Ordinary Shares Percentage held 4,037,573 4,012,500 2,995,150 2,990,220 2,251,725 1,664,200 10.61 10.54 7.87 7.86 5.92 4.37 FINANCIAL INSTRUMENTS The Group’s financial instruments, other than derivatives, comprise borrowings, some cash and liquid resources, and various items, such as trade debtors, trade creditors, etc. that arise directly from its operations. The Group’s financial liabilities comprise borrowings, trade creditors, other creditors and finance leases, the main purpose of which is to raise finance for the Group’s operations. The Group also has financial assets comprising cash, trade and other debtors. The Group also enters into derivatives transactions (principally forward foreign currency contracts). The purpose of such transactions is to manage the currency risks arising from the Group’s operations. The Group has a FX collar in place to minimise risk on translation of Euro denominated intercompany loans. It is, and has been throughout the period under review, the Group’s policy that no speculative trading in financial instruments shall be undertaken. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, credit risk and foreign currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have been reviewed and remain unchanged. Interest rate risk The Group finances its operations through a mixture of retained profits and bank borrowings. The Group borrows, principally in Sterling, at floating rates of interest to meet short term funding requirements. At the year end the Group’s only borrowings were finance leases, a revolving credit facility, bank overdrafts and a fixed term loan agreement. An interest rate 10 HORNBY PLC Annual Report & Accounts 2010 hedge is in place to protect the Group against future interest rate rises. Credit risk The Group manages its credit risk through a combination of internal credit management policies and procedures and external credit insurance. Liquidity risk The Group re-arranged its borrowings into a revolving credit facility (£10 million – expiring July 2012) and a fixed-term loan agreement (£12 million – expiring July 2014). Previously the Group had a fixed term loan (£10 million) and an overdraft facility (£12 million). The Group’s policy on liquidity risk is to ensure that sufficient cash is available to fund future operations. The peak level of net debt in the year to March 2010 was £16.0 million (2009 – £19.2 million). The Board manages exposure to liquidity risk by maintaining adequate facilities to meet the future needs of the business. Those needs are determined by monitoring forecast and actual cash flows. The Group regularly monitors its performance against its banking covenants to ensure compliance. Foreign currency risk The Group purchases substantially all of its products from the Far East in Hong Kong and US Dollars. The Group’s policy is to reduce currency exposure arising from its purchases and anticipated orders by using forward foreign exchange contracts of up to 12 months. All sales and other purchases originating in the UK are denominated in Sterling. The Company has subsidiaries in the USA, Spain, Italy, France and Germany. At present the Company does not consider the balance sheet translation exposure significant enough to warrant matching the net currency assets with currency borrowings but the position will be reviewed annually going forward. The Group has granted Euro denominated intercompany loans to subsidiary companies that are translated to Sterling at statutory period ends thereby creating exchange gains or losses. In order to mitigate the exchange exposure the Group has entered a foreign exchange collar contract to sell an equal number of Euros in October 2011 that will be revalued by an approximately similar but opposite Sterling value at each period end. PERSONNEL POLICIES It is the policy of the Group to follow equal opportunity employment practices and these include the full consideration of employment prospects for the disabled. Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. Arrangements are made, wherever possible, for retraining employees who become disabled, to enable them to perform work identified as appropriate to their aptitudes. The Group places importance on the contributions to be made by all employees to the progress of the Group and aims to keep them informed by the use of formal and informal meetings. CREDITOR PAYMENT POLICY The Group has agreed a variety of payment terms with its suppliers. It is and will remain the general policy of the Group that payments to a supplier are made in accordance with the general conditions of purchase agreed with that supplier, providing the supplier complies with all relevant terms and conditions and also that the invoice is presented in a timely fashion. The average creditor payment period for the main trading subsidiary at 31 March 2010 was 42 days (2009 – 24 days). The Company itself does not trade and therefore has no external trade creditors. AUDITORS A resolution to re-appoint the auditors, PricewaterhouseCoopers LLP, will be proposed at the forthcoming Annual General Meeting. ANNUAL GENERAL MEETING The notice of Annual General Meeting is important and requires your immediate attention. If you are in any doubt as to what action to take in relation to the Annual General Meeting, you should consult appropriate independent advisers. The notice of the Annual General Meeting is set out on pages 69 to 71. HORNBY PLC Annual Report & Accounts 2010 11 Directors' Report (continued) expansion and its overall financial position. The directors would exercise the authority to purchase ordinary shares only if they considered it to be in the best interest of the members and they believe that the effect of such purchases will be to increase earnings per share. The Company (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 came into force on 1 December 2003. These regulations allow shares repurchased by the Company to be held as treasury shares. Treasury shares may be cancelled, sold for cash or used for the purpose of employee share schemes but all rights attaching to them, including voting rights and any right to receive dividends, are suspended whilst they are held in treasury. The authority to be sought by this resolution is intended to apply equally to shares to be held by the Company as treasury shares. The Company currently holds no treasury shares. The authority sought at the Annual General Meeting will expire at the earlier of the date which falls eighteen months from the date the resolution is passed and the conclusion of the next annual general meeting of the Company. By order of the Board A J Morris Finance Director Westwood Margate Kent CT9 4JX 4 June 2010 Resolution 9 Under section 551 of the Companies Act 2006 (the ‘Act’), the directors may allot unissued shares only if authorised to do so. This resolution will give the directors authority to issue new ordinary shares in the capital of the Company up to a nominal value of £125,000, which is equal to approximately 33% of the Company’s issued ordinary capital as at the date of the notice. This authority will expire on 28 July 2015. The directors do not have any present intention of exercising the authority granted by this resolution except in connection with the Company’s share schemes. Under the guidelines of the Association of British Insurers on authority to allot shares companies may seek basic authority to allot new shares in an amount of up to one-third of the existing issued share capital and this request will be regarded as routine under guidelines. Resolution 10 It is proposed to renew the authority to the directors to allot equity securities for cash without first being required to offer such securities to existing members. This will include the sale for cash on a non pre-emptive basis of any shares which the Company holds in treasury. The authority relates to up to £19,000 of nominal capital representing 5% of the issued ordinary share capital of the Company as at the date of the notice. The authority sought at the Annual General Meeting will expire at the conclusion of the next annual general meeting of the Company. The directors do not intend to issue more than 7.5% of the issued ordinary share capital of the Company in any rolling three year period without prior consultation with the Institutional Investment Committee. Members will note that this resolution also relates to the sale of treasury shares. Resolution 11 The Company is seeking authority to purchase approximately 10% of the Company’s issued ordinary share capital at, or between, the minimum and maximum prices specified in the resolution. As at the date of the notice the total number of options to subscribe for shares in the Company was 2,176,467 (approximately 5.7% of the Company’s issued ordinary share capital and approximately 6.4% of the Company’s issued ordinary share capital if the full authority proposed by resolution 11 was used and the shares purchased were cancelled). This power would be used only after careful consideration by the directors, having taken into account market conditions prevailing at that time, the investment needs of the Company, its opportunities for 12 HORNBY PLC Annual Report & Accounts 2010 Corporate Governance Statement The Company is committed to the principles of corporate governance contained in the Combined Code of Corporate Governance issued in 2008 by the Financial Reporting Council (‘the Code’) (which can be found at www.frc.org.uk) for which the Board is accountable to shareholders. Statement of Compliance with the Combined Code Throughout the year ended 31 March 2010, the Company has been in compliance with the Code provisions set out in section 1 of the Code. are complied with. The executive directors have all received appropriate training for their appointment to the Board of a listed company. The non-executive directors bring a broad expertise to the Board. N A Johnson, N M Carrington and M E Rolfe are all experienced company directors. Biographical details of each director are shown on pages 9 and 10. The Board has formal and informal procedures to monitor its performance both as individuals at annual appraisals and as a Board. Statement about applying the principles of the Code The Company has applied the principles set out in section 1 of the Code, including both the main principles and the supporting principles. Further explanation of how the principles and supporting principles have been applied is set out below. DIRECTORS Board effectiveness The Board has ultimate responsibility and accountability for the Group’s operations. During the year the Board comprised the non-executive Chairman, Chief Executive, Finance Director, and two non- executive directors. During the year 11 Board meetings were held. All directors attended all meetings during their period of office. The Board believes its current structure is appropriate for the scale of the business and to enable the Group to be managed efficiently. The Board has adopted a formal schedule of matters specifically reserved to it for decisions including the determination of the strategy, the approval of business plans, budgets, acquisitions and disposals, major capital purchases, Board appointments, accounting policies and treasury arrangements. The Board also delegates specific responsibilities to committees as described below. The Board meets monthly and monitors progress against plan at each meeting. The directors have the authority of the Board to obtain external legal or other independent professional advice in the furtherance of their duties at the Company’s expense. All directors have access to the advice and services of the Company Secretary, who is responsible for ensuring Board procedures are followed and applicable rules and regulations Chairman and Chief Executive The roles of Chairman and Chief Executive are separate and there is a clear division of responsibility. The Chairman is responsible for leading the Board and ensuring its effectiveness. The Chairman and the Board are satisfied that effective communication, principally by the Chief Executive and Group Finance Director, is undertaken with the shareholders. The Chief Executive is responsible for running the business and ensuring that accurate, timely and clear information is presented at monthly Board meetings or when appropriate. Senior Independent Director The Board has appointed N M Carrington to the role of Senior Independent Director. This role provides a point of contact to those shareholders who wish to raise issues with the Board, other than through the Chairman. Board balance and independence The Board considers the non-executive directors who served during the year to be independent of management and free from any business or other relationship which could interfere with the exercise of their independent judgement. Code provision A.3.2 requires at least half the Board, excluding the Chairman, to be independent non-executive directors and smaller companies are only required to have only two non- executive directors. N A Johnson has served on the Board for more than eleven years and has been its Chairman for nine years. In line with the Combined Code the Senior Independent Director, N M Carrington, has undertaken a rigorous review of the effectiveness of the performance of the Chairman as well as a review of his contribution to the Board, based on a questionnaire and discussion with other members of the Board, and has concluded that the Chairman continues to be an effective non-executive director and to execute commitment to the role. HORNBY PLC Annual Report & Accounts 2010 13 Corporate Governance Statement (continued) Appointments to the Board Nominations Committee There have been no appointments to the Board during the year ended 31 March 2010. Appointments to the Board require the Board’s authorisation and are conducted by the Nominations Committee. The Nominations Committee comprises the Chairman, executive and non-executive directors. During the year there were no meetings held. The duties of the Nominations Committee are available from the terms of reference and include regularly reviewing the structure, size and composition required of the Board and making recommendations to the Board with regard to any changes, giving full consideration to succession planning for directors and other senior executives, identifying and nominating candidates to fill board vacancies and evaluating the balance of skills, knowledge and experience on the Board before an appointment is made. The potential candidates are interviewed by either the Nominations Committee or a panel appointed by that Committee. An appointment requires the final approval of the Board prior to an offer being forwarded. The Nominations Committee are also required to review annually the time required from non-executive directors to assess whether the non-executive directors are spending enough time to fulfil their duties. Terms of reference of the Nominations Committee and terms and conditions of appointment for non-executive directors are available on request from the Company Secretary. Information and professional development The Chief Executive is responsible for ensuring that directors receive accurate, timely and clear information. Management has an obligation to provide such information but directors should seek clarification or amplification where necessary. The Chairman is responsible for ensuring that directors continually update their skills and the knowledge and familiarity with the Company required to fulfil their role. Resources are available on request to develop and update the directors’ knowledge and capabilities. Performance Evaluation During the year a performance evaluation of the Board and its committees has taken place by way of a performance evaluation questionnaire. The results of this questionnaire were summarised in a report which was presented to the Board. 14 HORNBY PLC Annual Report & Accounts 2010 In the year under review the report identified no areas of concern. Re-election N A Johnson, having served for more than ten years, will retire and offer himself for re-election at the Annual General Meeting and annually thereafter in accordance with the Combined Code. The Company’s Articles of Association currently require one third of the directors to retire by rotation at each Annual General Meeting. Thereby A J Morris and M E Rolfe offer themselves for re-election at the forthcoming Annual General Meeting. In accordance with the Combined Code, the non- retiring directors have conducted a review of A J Morris and M E Rolfe’s contribution to the Board and the Chairman can confirm that they continue to be effective directors and to execute commitment to the role. Remuneration Committee The Remuneration Committee comprises N M Carrington and M E Rolfe. N M Carrington is the Chairman of the Remuneration Committee. The Committee met four times during the year with all members being present. The Committee is responsible for establishing formal and transparent procedures for determining policy on executive remuneration and advising the Board on executive remuneration and in particular for ensuring that executive remuneration packages are sufficient to attract, retain and motivate executive directors of the required quality whilst avoiding paying more than necessary. It also endeavours to establish performance related elements of remuneration which align the interests of the directors with those of the shareholders. No director is involved in deciding his own remuneration and the Board itself determines the remuneration of the non-executive directors. Further details of directors’ remuneration is provided in the Directors’ Remuneration Report. Audit Committee and Auditors The Audit Committee comprises N M Carrington and M E Rolfe. M E Rolfe became Chairman of the Audit Committee on 28 July 2008. Mark is a Fellow of the Institute of Chartered Accountants in England and Wales and is considered by the Board to have recent and relevant financial experience. N M Carrington has a wide range of business experience, which is evidenced by his biography set out in the Directors’ Report. The Committee meets at least three times a year and the Chairman, Chief Executive, Finance Director, Company Secretary and other managers attend by invitation. The Group’s Auditors attend meetings and have direct access to the Committee. The Audit Committee’s terms of reference include all matters indicated by the Combined Code. The terms of reference are considered annually by the Audit Committee and are then referred to the Board for approval. The main duties of the Committee, set out in its terms of reference, are to: • • • • • Make recommendations on the appointment and remuneration of the external auditors and monitor their performance. Review the nature and scope of the work to be performed by the external auditors, the results of their audit work and management’s responses. Monitor the independence of the external auditors and recommend policy for any non-audit services they provide to ensure that their independence is not compromised. Review and advise the Board on the Company’s interim and annual financial statements and related announcements, its accounting policies and on the control and mitigation of its financial and business risks. Review and advise the Board on the effectiveness of the Company’s internal control environment, including its procedures for detecting fraud and ‘whistle blowing’. Activity during the year During the year, three Audit Committee meetings were held. All members attended all meetings during their period in office. The Committee met privately with the external auditors without executives present, and with the Finance Director. The Committee reviewed the Company’s interim and annual financial statements and related announcements, along with a report from the external auditors setting out the findings from their audit work. The Committee has adopted a specific policy on auditor independence, setting out restrictions on specific non-audit activities such as bookkeeping, payroll services and advocacy, and procedures and authority levels for audit and non-audit fees. The authority levels beyond which prior approval from the Audit Committee is required are set as 1:1 for the audit / non audit fee ratio. Hornby believes that it receives particular benefit from the external auditors’ advice on potential acquisitions and the tax consequences thereof, given its auditors’ detailed knowledge of the Group. The Board considers alternative providers if practical and seeks confirmation prior to engaging services that independence will not be compromised. In the current financial year the level of non audit fees was well within the 1:1 ratio. In the previous financial year the level of non audit fees exceeded the ratio due to due diligence activities, undertaken with the prior approval of the Committee. To assess the effectiveness of the external auditors, the Committee reviewed their fulfilment of the agreed audit plan; the robustness and perceptiveness of the auditors in their handling of key accounting and audit judgements, the content of their letter to management on control matters and adherence to service standards set out in Hornby’s Audit Charter policy. There are no contractual restrictions on the choice of the Committee as to external audit and, having considered the services provided by the current external auditors, PricewaterhouseCoopers LLP, their independence and knowledge of the Group, the Committee has recommended to the Board the reappointment of the auditors at the Annual General Meeting in July 2010. In reaching this decision the Committee has taken into account the tenure of the auditors and considered whether there should be a full tender process. The Committee also had regard to the likelihood of a withdrawal of the auditor from the market. The Committee considers annually the need for an internal audit function, but currently believes that this is not justified given the size, nature of the Group and a programme of visits to Hornby locations carried out by senior Group financial management. Arrangements exist for staff of the Group to raise concerns, in confidence, about possible improprieties in matters of financial reporting or other matters. During the year, the Audit Committee has continued to strengthen the policy in this area in recognition of the Group’s growing international presence. Internal Control and Risk Management The Board is responsible for the operation and effectiveness of the Group’s system of internal controls and risk management. There is a continuous process for identifying, evaluating and managing the significant risks the Group faces. HORNBY PLC Annual Report & Accounts 2010 15 Corporate Governance Statement (continued) This process has been in place throughout the year and complies fully with the Turnbull guidance. the Company and the UK subsidiary attend the meeting to respond to specific questions. The Board regularly reviews the effectiveness of the Group’s system of internal control. The Board’s monitoring covers all controls, including financial, operational and compliance controls and risk management. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The internal control systems are designed to meet the Group’s particular needs and the risks to which it is exposed and by their nature can only provide reasonable but not absolute assurance against misstatement or loss. During the year, the Group continued to take action to enhance these control systems, based upon its own process improvement initiatives and auditors’ recommendations. The Audit Committee reviews and reports to the Board on the effectiveness of the Group’s systems of internal control on an ongoing basis during the year and no significant weaknesses have been identified. Control Environment The Board has put in place an organisational structure with clearly defined and understood lines of responsibility and delegation of authority. The Board promotes a strong control environment with a strong ethical climate. RELATIONS WITH SHAREHOLDERS The Company communicates regularly with its institutional shareholders and encourages communication with private investors through the Annual General Meeting. N M Carrington is the senior independent non-executive director. The senior independent non-executive director welcomes direct discussion with shareholders. The executive directors update major shareholders at institutional visits and analyst presentations immediately after the interim and final announcements. The Chairman attends a selection of these meetings. The meetings facilitate open discussion and direct face-to-face contact and the views of shareholders are reported to the Board by the Chairman and Chief Executive. The Board uses the Annual General Meeting as an occasion for communication with its shareholders. All proxy votes are counted by the Company’s registrars and the voting on each resolution is made available to the meeting. Directors of 16 HORNBY PLC Annual Report & Accounts 2010 IDENTIFICATION OF BUSINESS RISKS The Board has the primary responsibility for identifying the major business risks facing the Group and developing appropriate policies to manage those risks. The Board has completed a risk assessment programme in order to identify the major business risks and has reviewed and determined any mitigating actions required. BUSINESS RISKS UK Market Dependence The UK market represents a significant part of Group revenue; 63% in 2010 (2009 – 62%). In order to reduce the proportional exposure to the UK market the Board’s strategy continues to be to expand overseas sales. The acquisitions of the brands Airfix, Humbrol, Corgi, Electrotren, Rivarossi, Lima and Jouef have provided the Group significant market shares of the model railway, model and die cast markets in UK, Spain, Italy, France and Germany to facilitate European expansion. Market Conditions The Group’s products are sold in the main to its retail customers. The performance of the market is affected by the general economic climate including overall consumer and retailer confidence, interest rates and the level of unemployment. In reviewing the future forecasts for the business the directors consider reasonable changes in macro economic and associated market conditions, albeit any significant downturn could negatively impact Group sales and margins. Foreign Exchange The Group purchases goods in Hong Kong and US Dollars and is therefore exposed to exchange rate fluctuations. The Group hedges the short-term exposure by establishing forward currency purchases using fixed rate and participating forward contracts up to twelve months ahead. It is deemed impractical to hedge exchange rate movements beyond that period. Translation risk on intercompany loans is managed through a foreign exchange collar. Overseas Suppliers The Group purchases goods, in the main from third party Chinese suppliers. The principal supplier to the Group, Sanda Kan, is owned by Kader Holdings Company Limited a Hong Kong based company with interests in the model train sectors in Europe and the US. The purchase of products from lower-wage economies provides the Group with a significant cost advantage when competing with locally-manufactured products in Europe. However the Group does not have exclusive arrangements with its suppliers and there is a risk that competition for manufacturing capacity can lead to delays in introducing new products or servicing existing demand. Furthermore, there is a risk that input price escalation could reduce or remove the Group’s pricing advantage. The Group seeks to mitigate these risks by continuing to develop and diversify the Group’s supplier portfolio, which includes a supplier in India, and through closely monitoring production through locally-based employees (who also ensure the maintenance of quality standards). Product compliance The Group’s products are subject to compliance with toy safety legislation around the world. The Group manages compliance through active monitoring of legislation, robust internal processes and procedures, and policy debate and lobbying with the relevant authorities. Competition The Group has competition in the model railway, slot racing, model kits, die cast and paint market but in many of our markets the group enjoys a strong market position due to the continued development of our brands. Brands are all important in the models sector. In addition market entry capital cost is prohibitive to new entrants even for individual models but especially as they would need to offer an entire branded system. Main control procedures Management establishes control policies and procedures in response to each of the key risks identified. Control procedures operate to ensure the integrity of the Group’s financial statements, designed to meet the Group’s requirements and risks identified in each area of the business. Control procedures are documented where appropriate and reviewed by management and the Board on an ongoing basis to ensure control weaknesses are mitigated. The Group operates a comprehensive annual planning and budgeting system. The annual plans and budgets are approved by the Board. The Board reviews the management accounts at its monthly meetings and financial forecasts are updated monthly and quarterly. Performance against budget is monitored and where any significant deviations are identified appropriate action is taken. Monitoring system used by the Board The Board as a whole monitors the operation of the system of internal control through management reviews of the effectiveness of the system of internal control each year. The Board has adopted a schedule of matters which are required to be brought to it for decision in order to ensure that it maintains full and effective control over appropriate strategic, financial, organisational and compliance issues, including procedures for seeking and obtaining approval for major transactions and capital purchases. The Board reviews the effectiveness of the system of internal controls on a continuous basis and considers it appropriate for the size of the Group. The review comprises regular scrutiny of monthly accounts and reports prepared by individual subsidiary companies. The Board also regularly reviews and formalises financial authority limits throughout the Group. Corporate Social Responsibility The Board considers the social, environmental and ethical matters pertinent to the Group, and will review items of significance where appropriate. The risk assessment procedures in place are designed to highlight any key areas of concern including health and safety considerations, employee recruitment and retention and environmental issues, with controls put in place as necessary. The Group is pro-active in working with all suppliers to ensure compliance with the International Council of Toy Industries (ICTI) Code of Business Practices to include child and forced labour, working conditions, hours of work, pay, non-discrimination and health and safety. Compliance is managed through an annual audit process. Environmental Responsibility Hornby Group believes that protection of the environment is an integral part of good practice and that it satisfies itself that all of its operations are conducted with reasonable proper regard for the environment. It is committed to maintaining, and wherever possible improving, the quality of this environment both for the people who work in the Group, and for the wider community now and in the future. The Group seeks to make the most effective and efficient use of all resources, encouraging all members of the Group to develop an ecologically sound approach to their work. HORNBY PLC Annual Report & Accounts 2010 17 Corporate Governance Statement (continued) Going Concern A review of Group business activities and future outlook are set out on pages 4 to 7 of the Chief Executive’s Report. The financial position of the Group, its cash flows and liquidity position are shown in the balance sheet, cash flow statement and accompanying notes to the financial statements. The principal business risks associated with the business are shown on pages 16 to 17, whilst the risks arising from the Group’s financial instruments are covered on pages 10 to 11. The Company’s Articles of Association (the ‘Articles’) give the Board power to appoint directors, but also require directors to retire and submit themselves for election at the first Annual General Meeting following their appointment. A director who retires in this way is eligible for election but is not taken into account when deciding how many directors should retire by rotation at the Annual General Meeting. The Articles themselves may be amended by special resolution of the shareholders. The directors, in their consideration of going concern, have reviewed the Group’s future cash flow forecasts and revenue projections, which they believe are based on a realistic assessment of future business performance. The Group’s forecasts and projections, taking account of reasonable possible changes in trading performance, show that the Group should be able to operate within the levels of its agreed facilities. Accordingly the directors believe it appropriate to prepare the financial statements of the Group on a going concern basis. Takeovers Directive Pursuant to S992 of the Companies Act 2006, which implements the EU Takeovers Directive, the Company is required to disclose certain additional information. The following gives those disclosures which are not covered elsewhere in this Annual Report. Pursuant to the Articles, at every Annual General Meeting, one third of the current directors must retire by rotation. The Board of Directors is responsible for the management of the business of the Company and may exercise all the powers of the Company subject to the provisions of the Company’s Memorandum of Association and the Articles. The Articles contain specific provisions and restrictions regarding the Company’s power to borrow money. Powers relating to the issuing and buying back of shares are also included in the Articles and shareholders are asked to renew such authorities each year at the AGM. A copy of the Articles is available on request from the Company Secretary. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company following a takeover, such as commercial contracts, bank agreements, property lease arrangements and employees’ share plans. None of these are deemed to be significant in terms of their potential impact on the business of the Group as a whole. 18 HORNBY PLC Annual Report & Accounts 2010 Directors' Remuneration Report For the year ended 31 March 2010 Introduction This report has been prepared in accordance with the Companies Act 2006 and Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to directors’ remuneration in the Combined Code. A resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved. The report has been divided into separate sections for audited and unaudited information. UNAUDITED INFORMATION Remuneration Committee The Company has established a Remuneration Committee (the ‘Committee’) which is constituted in accordance with the recommendations of the Combined Code. The Committee is comprised of independent non-executive directors. The current members of the Committee are N M Carrington (Committee Chairman) and M E Rolfe, both of whom served throughout the financial year. The Committee meets regularly but more frequently if required. During the year four Remuneration Committee meetings were held, with both members present at each meeting. Neither of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Committee makes recommendations to the Board. No director plays a part in any discussion about their remuneration. The terms of reference of the Committee are available from the Company Secretary on request. In determining the directors’ remuneration for the year, the Committee consulted F Martin (Chief Executive) about its proposals. Hewitt New Bridge Street (‘HNBS’), the Committee’s appointed remuneration adviser, continues to provide advice to the Committee. HNBS provides no other services to the Company. Remuneration policy for the Executive Directors General policy Executive remuneration packages are designed to attract, motivate and retain directors of the high calibre needed to maintain the Group’s position as a market leader and to reward them for enhancing value to shareholders. The performance measurement of the executive directors is undertaken by the Committee. There are five main elements of the remuneration package for executive directors and senior management: • • • • • Base salary Benefits-in-kind Pension arrangements Performance-related annual bonus Performance Share Plan The Company’s policy is that a substantial proportion of the remuneration of the executive directors should be performance related. Salary and benefits Executive directors’ base salaries are reviewed annually by the Committee taking into account the responsibilities, skills and experience of each individual, pay and employment conditions within the Company and salary levels within listed companies of a similar size. Base salary levels as at 1 April 2009 and 2010 are as follows: Director Role Salary at 1 April 2010 Salary at 1 April 2009 F Martin A J Morris Chief Executive Finance Director £256,250 £169,125 £250,000 £165,000 Base salary levels were reviewed during the first quarter of 2010 and, consistent with the average increase awarded across the Group, increased by 2.5% from 1 April 2010. Policies concerning benefits, including the Group’s company car policy, are reviewed periodically. Currently, benefits in kind comprise of motor cars and private health cover. Pension The executive directors and senior managers are members of defined contribution pension schemes and annual contributions are calculated by reference to base salaries, with neither annual bonuses nor awards under the share incentive schemes taken into account in calculating the amounts due. The contribution level continues to be 20% of base salary for executive directors. Performance-related annual bonus Executive directors participate in a performance-related bonus scheme. The maximum bonus continues to be capped HORNBY PLC Annual Report & Accounts 2010 19 Directors' Remuneration Report (continued) at 100% of base salary for the Chief Executive and 75% of salary for the Finance Director. Performance targets are designed both to stretch and encourage individuals whilst aligning their interests with that of the Group. The performance conditions are divided 80:20 between Group profit before tax and personal objectives. For the Group profit before tax condition, a sliding scale range is set around a target level (designed to be stretching but realistically achievable). The personal objectives are set at the start of the year and are designed to be as objective and measurable as possible. In respect of the year ended 31 March 2010 both of the executive directors were entitled to a bonus, details of which appear in the table of directors’ emoluments. Performance Share Plan The Performance Share Plan (‘PSP’), which was approved by shareholders at the 2008 AGM, was introduced as the Company’s primary long-term incentive plan to replace the short-term incentive plan (‘STIP’). No further awards will be made under the STIP although legacy awards continue to vest on their original terms. Under the PSP, awards are made to executive directors and selected other executives on the following basis: • • • • The maximum award level is 150% of base salary per annum although awards up to 200% of base salary may be granted to an individual in exceptional circumstances (e.g. recruitment or retention). The current policy is to grant awards over shares worth 100% of salary. An award is subject to a total shareholder return (‘TSR’) condition and a range of normalised underlying earnings per share growth targets, each applying to a separate 50% of an award and measured over a period of three financial years. The TSR condition is based on the Company’s underlying performance against the constituents of the FTSE Small Cap (excluding investment trusts) as at the date of grant. 25% of this part of the award will vest if Hornby’s TSR is equal to the TSR of the median company, with full vesting for top quartile performance. A sliding scale operates between these points. For the EPS part of the award, 25% vests for average annual underlying EPS growth of RPI+3% p.a., with full vesting for average annual EPS growth of RPI+10% p.a. A sliding scale operates between these points. • • • • The Committee is comfortable that the blend of TSR and EPS targets continues to provide a good balance between incentivising and rewarding strong financial performance on the one hand whilst, on the other hand, providing a strong and direct alignment with the interests of institutional shareholders by rewarding stock market outperformance. Performance conditions are calculated by independent advisers and verified by the Committee. Executives benefit, in the form of additional cash or shares, from the value of dividends paid over the vesting period, to the extent that awards vest. It is currently intended that market purchased shares are used to satisfy awards although there is flexibility to use new issue and treasury shares within institutional shareholder dilution limits. Shareholding guidelines A policy for share ownership guidelines is operated for the executive directors and senior executives. For the executive directors, the required threshold of share ownership is 100% of base salary. Until such time as this level of shareholding is achieved, 50% of the net of tax value of awards which vest under the PSP are required to be retained. Executive Directors’ Service Contracts The executive directors do not have fixed period contracts. Frank Martin’s service contract dated 26 February 2001 includes a notice period of one year to be given by the Company and of six months to be given by F Martin. In lieu of giving notice the Company may terminate the agreement on payment of a lump sum (subject to tax and national insurance) equal to the salary and other benefits to which he is entitled under this agreement. Andrew J Morris’s service contract dated 23 November 2007 includes a notice period of one year to be given by the Company and of six months to be given by A J Morris. In lieu of giving notice the Company may terminate the agreement on payment of a lump sum (subject to tax and national insurance) equal to the salary and other benefits to which he is entitled under this agreement. Non-Executive Directors’ Contracts The remuneration of the non-executive directors is determined by the Board (except the Company Chairman’s fee, which is set and reviewed by the Remuneration Committee) based on the level of fees paid to non- 20 HORNBY PLC Annual Report & Accounts 2010 executive directors of similar companies and by considering independent external advice. Neil A Johnson was appointed non-executive Chairman on 22 December 2000 having initially joined the Board on 1 July 1998 and receives salary and fees for his services to the Company of £90,000 per annum effective 1 April 2007. 80% is paid to a third-party consultancy company and 20% treated as earnings. N A Johnson’s service contract dated 13 February 2006, amended March 2007, is subject to termination on six months notice to be given by either the Company or N A Johnson. In lieu of giving notice the Company may terminate the agreement on payment of a lump sum (subject to tax and national insurance) equal to the salary to which he is entitled under this agreement. Nigel M Carrington, non-executive director, was appointed to the Board on 1 December 2007, and receives fees for his services to the Company of £35,000 per annum effective 1 December 2007. N M Carrington’s service contract dated 3 November 2007 is subject to termination on six months notice to be given by either the Company or N M Carrington. In lieu of giving notice the Company may terminate the agreement on payment of a lump sum (subject to tax and national insurance) equal to the fee to which he is entitled under this agreement. Mark E Rolfe, non-executive director, was appointed to the Board on 1 January 2008, and receives fees for his services to the Company of £35,000 per annum effective 1 January 2008. M E Rolfe’s service contract dated 22 November 2007 is subject to termination on six months notice to be given by either the Company or M E Rolfe. In lieu of giving notice the Company may terminate the agreement on payment of a lump sum (subject to tax and national insurance) equal to the fee to which he is entitled under this agreement. None of the non-executive directors receives any pension or performance-related pay from the Company. HORNBY PLC Annual Report & Accounts 2010 21 Directors’ Remuneration Report (continued) AUDITED INFORMATION Directors’ Interests Interests in shares The interests of the directors in the shares of the Company in the year were: At 31 March 2010 number At 31 March 2009 number N A Johnson F Martin A J Morris N M Carrington M E Rolfe 50,000 50,000 236,151 236,151 – 10,000 10,000 5,000 10,000 10,000 All the interests detailed above are beneficial. Apart from the interests disclosed above no directors were interested at any time in the year in the share capital of any other group company. There have been no other changes in the interests set out above between 31 March 2010 and 4 June 2010. Aggregate Directors’ remuneration The total amount for directors’ remuneration was as follows: Emoluments Money purchase pension contributions Directors’ detailed emoluments The emoluments of the directors were as follows: Chairman: N A Johnson Executive: F Martin A J Morris Non-executive: N M Carrington M E Rolfe Former director: N J Cosh 2010 £’000 809 84 893 2009 £’000 666 84 750 Salary & Fees £ Bonus1 £ Taxable Benefits2 £ Pension Contri- bution £ 2010 Total £ 2009 Total3 £ 90,000 – – – 90,000 90,000 250,000 165,000 141,500 70,043 13,090 9,382 50,000 454,590 349,563 33,845 278,270 226,803 35,000 35,000 – – – – – – – – – – 35,000 35,000 35,000 35,000 – 13,333 575,000 211,543 22,472 83,845 892,860 749,699 1. The Directors bonus award is based on performance targets. The targets are based on Group underlying profit before tax (80%) and personal objectives (20%). Both executive directors achieved 47% (out of a maximum 100%) for the profit before tax element and 95% (out of a maximum 100%) for the personal objectives element. 2. Taxable benefits relate to the provision of a company car and health assurance. The 2009 total column includes pension contributions which were F Martin (£50,000) and A J Morris (£33,845). 3. No directors waived emoluments in respect of the year ended 31 March 2010 (2009 – nil). 22 HORNBY PLC Annual Report & Accounts 2010 Performance Share Plan At 31 March 2010, outstanding awards to directors under the Performance Share Plan were as follows: Director F Martin A J Morris Award date July 2008 July 2009 July 2008 July 2009 Vesting date July 2011 July 2012 July 2011 July 2012 Market price at Award date 149.6p 136.0p 149.6p 136.0p At 1 April 2009 167,112 – 110,924 – Awarded during year – 183,824 – 121,324 Lapsed during year Vested during year – – – – – – – – At 31 March 2010 167,112 183,824 110,924 121,324 For the awards granted to date, 50% of an award is subject to a TSR condition and 50% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby’s TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points. For the EPS part of the award, 25% vests for average annual underlying EPS growth of RPI+3% p.a., with full vesting for average annual EPS growth of RPI+10% p.a. with a sliding scale operating between these points. Interests in share options Details of options held by directors at 31 March 2010 are set out below: Director Date of Grant Options held at 1 April 2009 Options granted during the year Options exercised during the year Options lapsed during the year Options held at 31 March 2010 Exercise price Exercise period F Martin 28 Mar 2002 1,000,000 A J Morris 3 Dec 2007 118,110 – – – – – 1,000,000 76.8p (118,110) – 254.0p 28/03/2005 -28/03/2012 3/12/2010 -3/12/2017 F Martin’s options granted March 2002 were subject to performance criteria requiring profit before interest and tax to exceed £4.0 million in the year ended 31 March 2003. This condition has been satisfied. Performance criteria for options granted to A J Morris required aggregated profit before tax for years ending 31 March 2008 to 2010 to exceed £32.7 million. This condition has not been satisfied. The directors above did not exercise any share options during the year and thus no gains were realised (2009 – no gains realised). The market price of the Company’s shares at 31 March 2010 was 126.25p and the range during the year ended 31 March 2010 was 67.5p to 170.0p. HORNBY PLC Annual Report & Accounts 2010 23 Directors’ Remuneration Report (continued) Short Term Incentive Plan At 31 March 2010, outstanding awards to directors under the Short Term Incentive Plan were as follows: Director F Martin Award date Vesting dates June 2005 June 2006 June 2008 June 2009 June 2009/10 June 2010/1/2 Market price at Award date 221.0p 266.0p 156.1p Number of shares – 9,424 81,572 A J Morris June 2008 June 2010/1/2 156.1p 5,106 Value of entitlement 31 March 2010 £’000 Value of entitlement 31 March 2009 £’000 – 12 103 115 6 14 13 56 83 3 On 22 June 2009, 20,812 shares of the 2005 Award and 9,423 shares of the 2006 Award were vested to F Martin. The share price on this date was 102.1p. Value of entitlement at 31 March 2010 is based on the closing market price of the Company’s shares of 126.25p (2009 – 68.25p). Performance graph The following graph shows the Company’s total shareholder return compared to the TSR of the FTSE Small Cap (excluding investment trusts) over the five year period to 31 March 2010. This index has been selected given that the Company is a constituent of the FTSE Small Cap. Total shareholder return Source: Datastream ) £ ( e u l a V 160 140 120 100 80 60 40 20 0 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 This graph shows the value, by 31 March 2010, of £100 invested in Hornby on 31 March 2005 compared with the value of £100 invested in the FTSE SmallCap (excluding investment trusts). The other points plotted are the values at intervening financial year-ends. Hornby FTSE SmallCap (excluding Investment Trusts) N M Carrington Remuneration Committee Chairman 4 June 2010 24 HORNBY PLC Annual Report & Accounts 2010 Statement of Directors’ responsibilities The directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and Parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. 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 the Company and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to: • • • select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements. 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 the Group and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the directors, whose names and functions are listed in the Directors and Corporate Information section, confirm that, to the best of their knowledge: • • the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and the Chief Executive’s Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. So far as the directors are 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 in order to make themself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. By order of the Board J W Stansfield Company Secretary 4 June 2010 HORNBY PLC Annual Report & Accounts 2010 25 Independent Auditors’ Report to the Members of Hornby Plc We have audited the financial statements of Hornby Plc for the year ended 31 March 2010 which comprise the Group and Company Statement of Comprehensive Income, the Group and Company Balance Sheet, the Statement of Changes in Equity, the Group and Company Cash Flow Statement, the Notes to the Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 25, 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 Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. 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 and the Parent Company’s profit and cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the lAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • • • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the information given in the Corporate Governance Statement set out on pages and risk management systems and about share capital structures is consistent with the financial statements. 13 to 18 with respect to internal control 26 HORNBY PLC Annual Report & Accounts 2010 Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required 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 part of the Directors’ Remuneration Report to be audited 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; or a corporate governance statement has not been prepared by the Parent Company. Under the Listing Rules we are required to review: • • the directors’ statement, set out on page 18, in relation to going concern; and the parts of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review. Graham Lambert (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Gatwick 4 June 2010 HORNBY PLC Annual Report & Accounts 2010 27 Group and Company Statement of Comprehensive Income for the year ended 31 March 2010 Group 2010 £’000 2009 £’000 Company 2010 £’000 2009 £’000 Note 2 64,736 (32,636) 61,569 (32,168) 1,361 – 32,100 (2,702) (13,602) (8,243) (1,549) 29,401 (2,454) (13,641) (7,976) 1,569 6,004 20 (809) 6,899 27 (805) 1,361 – – (892) (112) 357 228 (201) 1,540 – 1,540 – – (1,147) (60) 333 5,930 (280) 5,215 6,121 384 5,983 4 2 3 3 4 5,708 (98) (395) – 6,331 535 (370) (375) 5,215 6,121 384 – – – 384 6,240 – – (257) 5,983 5 (1,530) (1,909) (102) (118) 3,685 4,212 282 5,865 848 19 867 (813) (336) (1,149) 4,552 3,063 – 221 221 503 – (835) (835) 5,030 7 7 9.76p 9.60p 11.17p 10.98p Revenue Cost of sales Gross profit Distribution costs Selling and marketing costs Administrative expenses Other operating (expenses)/income Operating profit Finance income Finance costs Profit before taxation Analysed as: Underlying profit before taxation Net foreign exchange impact on intercompany loans Amortisation of intangibles Restructuring and abortive due diligence costs Profit before taxation Taxation Profit for the year after taxation Other comprehensive income Cash flow hedges, net of tax Currency translation differences Other comprehensive income for the year, net of tax Total comprehensive income for the year Earnings per ordinary share Basic Diluted All of the activities of the Group are continuing. 28 HORNBY PLC Annual Report & Accounts 2010 Group and Company Balance Sheet at 31 March 2010 Group 2010 £’000 2009 £’000 Company 2010 £’000 2009 £’000 Note Assets Non-current assets Goodwill Intangible assets Property, plant and equipment Investments Deferred tax assets Current assets Inventories Trade and other receivables Derivative financial investments Current tax assets Cash and cash equivalents Liabilities Current liabilities Borrowings Derivative financial instruments Trade and other payables Provisions Current tax liabilities Net current assets/(liabilities) Non-current liabilities Borrowings Deferred tax liabilities Net assets Equity attributable to owners of the parent Share capital Share premium Capital redemption reserve Translation reserve Hedging reserve Other reserves Retained earnings Total equity 8 9 10 11 20 12 13 19 17 14 13,416 5,227 10,020 – 140 13,624 5,689 10,523 – 67 – – 1,387 33,758 30 – – 1,433 32,989 18 28,803 29,903 35,175 34,440 12,273 13,291 750 175 8,998 14,368 13,119 – 124 427 35,487 28,038 (1,718) 18 19 (3,342) 15 (10,363) (391) 16 (1,020) 17 (5,138) (3,960) (8,270) (538) (999) (16,834) (18,905) 18,653 9,133 – 40 – 141 45 226 – – (308) – (144) (452) (226) – 8 – 9 8 25 – – (158) – – (158) (133) 18 (10,547) (281) 20 (7,181) (301) (5,373) (196) (5,580) (201) (10,828) (7,482) (5,569) (5,781) 36,628 31,554 29,380 28,526 21 380 5,340 55 (514) 168 1,688 29,511 380 5,278 55 (533) (680) 1,688 25,366 380 5,340 55 (1,369) – 19,145 5,829 380 5,278 55 (1,590) – 19,145 5,258 36,628 31,554 29,380 28,526 The financial statements on pages 28 to 32 were approved by the Board of directors on 4 June 2010 and were signed on its behalf by: F Martin Director HORNBY PLC Annual Report & Accounts 2010 29 Statement of Changes in Equity Years ended 31 March 2010 and 31 March 2009 Group Share capital £’000 Share premium £’000 Capital redemp- tion reserve £’000 Trans- lation reserve £’000 Hedging reserve £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 Balance at 1 April 2008 380 5,278 55 (197) 133 1,688 24,125 31,462 Total comprehensive income for the year Share-based payments Purchase of own shares for employee benefit trust Shares vested from employee benefit trust Dividends – – – – – – – – – – – – – – – – – – (336) (813) – – – – – – – – – – – – – – – – 4,212 3,063 224 224 (284) 294 (3,205) (284) 294 (3,205) (2,971) (2,971) Balance at 31 March 2009 380 5,278 55 (533) (680) 1,688 25,366 31,554 Total comprehensive income for the year Issue of shares Share-based payments Shares vested from employee benefit trust – – – – – – 62 – – 62 – – – – – 19 – – – – 848 – – – – – – – – – 3,685 – 289 171 4,552 62 289 171 460 522 Balance at 31 March 2010 380 5,340 55 (514) 168 1,688 29,511 36,628 Retained earnings includes £655,000 at 31 March 2010 (2009 – £672,000) which is not distributable and relates to a 1986 revaluation of land and buildings. Company Share capital £’000 Share premium £’000 Capital redemp- tion reserve £’000 Trans- lation reserve £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 Balance at 1 April 2008 380 5,278 55 (755) 19,145 2,374 26,477 Total comprehensive income for the year Share-based payments Dividends – – – – – – – – – – – – (835) – – – – – – – 5,865 224 (3,205) 5,030 224 (3,205) (2,981) (2,981) Balance at 31 March 2009 380 5,278 55 (1,590) 19,145 5,258 28,526 Total comprehensive income for the year Issue of shares Share-based payments – – – – – 62 – 62 – – – – 221 – – – – – – – 282 – 289 289 503 62 289 351 Balance at 31 March 2010 380 5,340 55 (1,369) 19,145 5,829 29,380 30 HORNBY PLC Annual Report & Accounts 2010 Group and Company Cash Flow Statement for the Year Ended 31 March 2010 Cash flows from operating activities Cash generated from operations Interest received Interest paid Tax (paid)/received Net cash generated from operating activities Cash flows from investing activities Purchase of trade assets and related costs Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Dividends received Net cash (used in)/generated from investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Proceeds from issue of loans Purchase of own shares by Short Term Incentive Plan Finance lease capital payments Dividends paid to Company’s shareholders Loans to subsidiary undertakings Group 2010 £’000 2009 £’000 Company 2010 £’000 2009 £’000 14,385 20 (809) (1,653) 11,377 27 (805) (2,594) 633 228 (201) (107) 350 190 (280) 49 11,943 8,005 553 309 – 2 (3,827) – (8,495) 2 (4,763) – (3,825) (13,256) – – – – – 62 3,333 – (19) – – – 8,684 (284) (19) (3,205) – 62 – – – – (592) – – (51) 5,740 5,689 – – – – (3,205) (2,737) Net cash generated from/(used in) financing activities 3,376 5,176 (530) (5,942) Effect of exchange rate movements Net increase/(decrease) in cash and cash equivalents Cash, cash equivalents and bank overdrafts at beginning of the year Cash, cash equivalents and bank overdrafts at end of year Cash, cash equivalents and bank overdrafts consist of: Cash and cash equivalents Bank overdrafts Cash, cash equivalents and bank overdrafts at end of year 445 (1,717) 11,939 (3,060) (1,792) (1,268) 8,879 (3,060) 8,998 (119) 427 (3,487) 8,879 (3,060) 14 37 8 45 45 – 45 (56) – 8 8 8 – 8 HORNBY PLC Annual Report & Accounts 2010 31 Notes to the Cash Flow Statement Cash flow from operating activities Profit before taxation Interest payable Interest receivable Dividends receivable Amortisation of intangible assets Depreciation (Profit)/loss on disposal of property, plant and equipment Share-based payments (Gain)/loss on financial derivatives (Decrease)/increase in provisions Decrease/(increase) in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Group 2010 £’000 2009 £’000 Company 2010 £’000 2009 £’000 5,215 809 (20) – 395 4,376 (1) 289 (24) (147) 2,095 (167) 1,565 6,121 805 (27) – 370 4,315 25 224 6 38 (1,735) (2,535) 3,770 384 201 (228) – – 46 – 112 – – – (29) 147 5,983 280 (190) (5,740) – 44 – 60 – – – 21 (108) Cash generated from operations 14,385 11,377 633 350 32 HORNBY PLC Annual Report & Accounts 2010 Notes to the Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES Accounting policies for the year ended 31 March 2010 The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. BASIS OF PREPARATION The financial information for the year ended 31 March 2010 has been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’), International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain financial liabilities (including derivative instruments) at fair value. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. BASIS OF CONSOLIDATION Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. ADOPTION OF NEW AND REVISED STANDARDS Interpretations effective in the current year IAS 1 (revised), ‘Presentation of financial statements’. The revised standard prohibits the presentation of items of income and expenses (that is ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All ‘non-owner changes in equity’ are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has elected to present one statement: a statement of comprehensive income. IFRS 8, ‘Operating segments’. IFRS 8 replaces IAS 14, ‘Segment reporting’. It requires a ‘management approach’ under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented, as the previously reported rest of Europe segment has been split into Spain, Italy and rest of Europe segments. Other segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Board that makes strategic decisions. IFRS 2 (amendment) ‘Share-based payment’. This revision of an existing standard deals with vesting conditions and cancellations. It HORNBY PLC Annual Report & Accounts 2010 33 Notes to the Financial Statements (continued) clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. Amendment to IFRS 7, ‘Financial instruments: Disclosures’ – The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosure and requires some specific quantitative disclosures for financial instruments in the lowest level of the hierarchy. In addition, the amendment clarifies and enhances existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. Amendment to IAS 23 ‘Borrowing costs’ – The amendment requires that borrowing costs incurred in the construction of qualifying assets commenced after 1 April 2009 are capitalised. Interpretations effective in the current year but not relevant The following interpretations to published standards are mandatory for accounting periods beginning on or after 1 April 2009 but are not relevant to the Group’s operations: IFRIC 13 ‘Customer loyalty programmes’ IFRIC 15 ‘Agreements for the construction of real estate’ Amendment to IAS 32 ‘Financial Instruments’ and IAS 1 ‘Presentation of financial statements’ Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 April 2010 or later periods, but the Group has not early adopted them: IFRS 3 Revised (Business combinations) IAS 39 Amendment (Financial instruments: Recognition and measurement on ‘Eligible hedged items’) IAS 38 Amendment (Intangible assets) The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. 34 HORNBY PLC Annual Report & Accounts 2010 RECONCILIATION OF STATUTORY TO NON STATUTORY INFORMATION IN THE CHAIRMAN’S STATEMENT AND CHIEF EXECUTIVE’S REPORT Underlying/adjusted profit before taxation is shown to present a clearer view of the trading performance of the business. Management has identified the following non-trivial adjustments, whose inclusion in earnings could distort underlying trading performance: net foreign exchange gains/losses on intercompany loans which are dependent on exchange rates from time to time and can be volatile, amortisation of intangibles which result from historic acquisitions and restructuring and in 2009 abortive due diligence costs which are not expected to recur. Profit before taxation Foreign exchange on intercompany loans including impact of foreign exchange collar* Amortisation of intangibles (note 9) Restructuring costs Abortive due diligence costs Underlying/adjusted profit before taxation Group 2010 £’000 5,215 98 395 – – 5,708 2009 £’000 6,121 (535) 370 154 221 6,331 The Statement of Comprehensive Income discloses foreign exchange movements and amortisation of intangibles in other operating income/(expenses). Restructuring and abortive due diligence costs were disclosed in administrative expenses. Reconciliation of net debt: Cash Total borrowings (note 18) Net debt 8,998 427 (12,152) (12,187) (3,154) (11,760) Hornby Hobbies Limited, the Group’s UK trading subsidiary, has granted Euro denominated intercompany loans to sister subsidiary companies that are translated into Sterling at statutory period ends thereby creating exchange gains or losses. In order to mitigate the exchange exposure Hornby Hobbies Limited has entered a foreign exchange collar contract to sell an equal number of Euros in October 2011 that will be revalued by an approximately similar but opposite Sterling value at each period end. * The foreign exchange collar is for a principal amount of Euro 16.5 million and is in place to minimise exposure to Euro denominated intercompany loans. The amount shown above comprises losses on translation of intercompany loans of £593,000 (2009 – gain of £2,459,000), offset by a gain on marking to market the foreign exchange collar of £495,000 (2009 – loss of £1,924,000). Beneficial impact of the collar as at 3 October 2011 is expected to be a minimum of £340,000 if the exchange rate exceeds the strike rate of €1.4300:£, increasing to a maximum of £823,000 at the participation cap rate of €1.3725:£ compared to the intercompany loans Sterling valuation at 31 March 2007 (€1.4734:£). As at 31 March 2010 the profit impact is a gain of £749,000. Therefore in the period 1 April 2010 to 30 September 2011 there will be an adjustment to the Statement of Comprehensive Income between a £74,000 profit and £409,000 charge. The derivative will become an increasingly efficient hedge as the contract approaches maturity. The fluctuation of foreign exchange and resultant impact on intercompany loans and foreign exchange collar is set out below: Date 06 Aug 2007 Transaction 31 Mar 2008 31 Mar 2009 31 Mar 2010 Total gain/(loss) to profit before tax Foreign Exchange Rate € : £ 1.47 1.25 1.08 1.12 €16.5 million intercompany loan in Sterling £’000 11,199 13,156 15,288 14,722 Gain/(loss) on loan £’000 – 1,957 4,089 3,523 Fair value collar £’000 – (1,346) (3,270) (2,774) Net gain/(loss) in Profit before tax £’000 – 611 208 (70) 749 HORNBY PLC Annual Report & Accounts 2010 35 Notes to the Financial Statements (continued) REVENUE RECOGNITION Revenue comprises the fair value of the sale of goods net of value added tax, rebates and discounts, royalty income and after eliminating sales within the Group. Revenue is recognised as follows: (a) Sales of goods Sales of goods are recognised when a Group entity has despatched products to the customer. (b) Royalty income Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements. (c) Sales returns The Group establishes a sales returns provision at the period end that reduces income in anticipation of customer returns of goods sold in the period. Dividend income in the Company is recognised upon receipt. Management fees are recognised in the Company on an accruals basis in relation to costs incurred on behalf of subsidiary companies. OPERATING SEGMENTS Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision- maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of the Group that makes strategic decisions. Operating profit of each reporting segment includes revenue and expenses directly attributable to or able to be allocated on a reasonable basis. Segment assets and liabilities are those operating assets and liabilities directly attributable to or that can be allocated on a reasonable basis. BUSINESS COMBINATIONS Goodwill arising on a business combination before 1 April 2004, the date of transition to IFRS, is not subject to amortisation but tested for impairment on an annual basis. Intangible assets arising on a business combination subsequent to 1 April 2004, are separately identified and valued, and subject to amortisation over their estimated economic lives. The carrying value of goodwill is reduced by any impairment amount recorded. GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose identified according to operating segment. 36 HORNBY PLC Annual Report & Accounts 2010 INTANGIBLES (a) Brand names Brand names are capitalised at fair value as at the date of acquisition. They are carried at their fair value less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the fair value of trade names over their estimated economic life of 15-20 years. (b) Customer lists Customer lists are capitalised at fair value as at the date of acquisition. They are carried at their fair value less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the fair value of customer relationships over their estimated economic life of 10 years. (c) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new products) are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Other development expenditures are recognised as an expense as incurred. The following useful lives have been determined for the intangible assets acquired: Brand names Customer lists Rent free period 15-20 years 10 years 0.5 years Brand names have been valued on a “relief from royalty” basis. Customer lists have been valued according to discounted incremental operating profit expected to be generated from each of them over their useful lives. Rent free period has been valued over the outstanding rental period. PROPERTY, PLANT AND EQUIPMENT Land and buildings are shown at cost less accumulated depreciation. Assets revalued prior to the transition to IFRS use this valuation as deemed cost at this date. Other fixed assets are shown at historical cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is provided at rates calculated to write off the cost or valuation of each asset, on a straight-line basis (with the exception of tools and moulds) over its expected useful life to their residual values, as follows: Freehold buildings Plant and equipment Motor vehicles – – – 30 to 50 years 5 to 10 years 4 years Freehold land is not depreciated. Tools and moulds are depreciated at varying rates in line with the related estimated product sales on an item-by-item basis up to a maximum of 4 years. HORNBY PLC Annual Report & Accounts 2010 37 Notes to the Financial Statements (continued) IMPAIRMENT OF NON-CURRENT ASSETS Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying value exceeds its recoverable amount, which is considered to be the higher of its value in use and fair value less costs to sell. In order to assess impairment, assets are grouped into the lowest levels for which there are separately identifiable cash flows (cash-generating units). Cash flows used to assess impairment are discounted using appropriate rates taking into account the cost of equity and any risks relevant to those assets. INVESTMENTS In the Company’s financial statements, investments in subsidiary undertakings are stated at cost less any impairment. Investments revalued using the equity method of valuation prior to the transition to IFRS use this valuation as deemed cost at this date. INVENTORIES Inventories are stated at the lower of cost and net realisable value. Cost is predominantly determined using the first-in, first-out (FIFO) method. Alternative methods may be authorised when proven to generate no material difference. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Net realisable value is based on anticipated selling price less further costs expected to be incurred to completion and disposal. Provisions are made against those stocks considered to be obsolete or excess to requirements on an item-by-item basis. The replacement cost, being based upon latest invoice prices before the balance sheet date, is considered to be higher than the balance sheet value of inventories at the year end due to price rises and exchange fluctuations. It is not considered practicable to provide an accurate estimate of the difference at the year end date. FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. FINANCIAL LIABILITIES AND EQUITY Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. TRADE RECEIVABLES Trade receivables are recognised initially at fair value and subsequently measured at amortised cost less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is recognised in the Statement of Comprehensive Income. TRADE PAYABLES Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. TAXATION INCLUDING DEFERRED TAX Corporation tax, where payable, is provided on taxable profits at the current rate. The taxation liabilities of certain Group undertakings are reduced wholly or in part by the surrender of losses by fellow Group undertakings. Deferred tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. 38 HORNBY PLC Annual Report & Accounts 2010 Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Tax relating to items recognised directly in equity is recognised in equity and not in the Statement of Comprehensive Income. Deferred tax assets and liabilities have not been discounted. KEY AREAS OF JUDGEMENT The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that may have an element of risk causing an adjustment to the carrying amounts of assets and liabilities within the next financial year include provisions for stock obsolescence, customer returns, doubtful debts, impairment reviews, fair values of share-based payments, fair values of derivatives and recoverability of deferred tax assets. All of the above are estimated with reference to historical data, expectation of future events and reviewed regularly. Further details in relation to impairment reviews are in note 8 and in relation to share-based payments in note 22. Liabilities and provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. The expense relating to any liability or provision is presented in the Statement of Comprehensive Income net of any reimbursement. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If material, provisions are determined by discounting the expected future cash flows of the Group at rates that reflect current market assessments of the time value of money. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash in hand, deposits at all banks, other liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts or loans where there is no right of set off are shown within borrowings in current or non-current liabilities on the balance sheet as appropriate. SHARE-BASED PAYMENT Hornby Plc operates three share-based plans: – Share Option Scheme – Short Term Incentive Plan – Performance Share Plan The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions. Share Option Scheme Fair value is measured by use of the Black Scholes model. The expected life used in the models has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. HORNBY PLC Annual Report & Accounts 2010 39 Notes to the Financial Statements (continued) Short Term Incentive Plan The Short Term Incentive Plan (STIP) investment is carried at the cost of the shares held. This investment in own shares is presented as a deduction from shareholders’ funds. The matched element of the STIP which has a condition of employment attached to it is recorded at fair value and spread over the vesting period of the shares and recognised in the Statement of Comprehensive Income over this period. Performance Share Plan Awards are granted to executive directors in shares worth 100% of salary, with lower levels of grant for less senior executives. The Performance Share Plan (PSP) incorporates two 3-year performance conditions – Total Shareholder Return (TSR) – Earnings per share (EPS) growth targets each applying to a separate 50% of the award and vest on the 3rd anniversary of grant as appropriate. The TSR fair value and the projected EPS award fair value are spread over the vesting period of the shares and recognised in the Statement of Comprehensive Income in the appropriate year. EMPLOYEE BENEFIT COSTS During the year the Group operated a defined contribution money purchase pension scheme under which it pays contributions based upon a percentage of the members’ basic salary. The scheme is administered by trustees either appointed by the Company or elected by the members (to constitute one third minimum). Contributions to defined contribution pension schemes are charged to the Statement of Comprehensive Income according to the year in which they are payable. Further information on pension costs and the scheme arrangements is provided in note 24. SHARE CAPITAL AND SHARE PREMIUM Ordinary shares issued are shown as share capital at nominal value. The premium received on the sale of shares in excess of the nominal value is shown as share premium within shareholders’ equity. LEASES The Group enters into operating and finance leases. Assets held under finance leases are initially reported at the fair value of the asset with an equivalent liability categorised as appropriate under creditors due within or after one year. The assets are depreciated over the shorter of the lease term and their useful economic lives. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance. Rentals are apportioned between finance charges and the reduction of the liability, and allocated to net interest. Assets under operating leases are charged on a straight-line basis to the Statement of Comprehensive Income over the lease term. 40 HORNBY PLC Annual Report & Accounts 2010 BORROWING COSTS Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the Statement of Comprehensive Income over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. FINANCIAL RISK MANAGEMENT Financial risk factors The Group’s operations expose it to a variety of financial risks that include the effects of changes in foreign currency exchange rates, market interest rates, credit risk and its liquidity position. The Group has in place a risk management programme that seeks to limit adverse effects on the financial performance of the Group by using foreign currency financial instruments. In addition other instruments are used to manage the Group’s interest rate exposure. (a) Foreign exchange risk The Group is exposed to foreign exchange risks against Sterling primarily on transactions in Hong Kong Dollars and US Dollars. It enters into forward currency contracts to hedge the cash flows of its product sourcing operation (ie it buys HK Dollars forward in exchange for Sterling) and looks forward 6-12 months on a rolling basis at forecasted purchase volumes. The policy framework requires hedging between 80 per cent and 100 per cent of anticipated import purchases that are denominated in HK Dollars. The Group has granted Euro denominated intercompany loans to subsidiary companies that are translated to Sterling at statutory period ends thereby creating exchange gains or losses. In order to mitigate the exchange exposure the Group has entered a foreign exchange collar contract to sell an equal number of Euros in October 2011 that will be revalued by an approximately similar but opposite Sterling value at each period end. (b) Interest rate risk The Group finances its operations through a mixture of retained profits and bank borrowings. The Group borrows, principally in Sterling, at floating rates of interest to meet short term funding requirements. At the year end the Group’s only borrowings were finance leases, a revolving credit facility, bank overdrafts and a fixed term loan agreement. An interest rate hedge is in place to protect the Group against future interest rate rises. (c) Credit risk The Group manages its credit risk through a combination of internal credit management policies and procedures and external credit insurance. (d) Liquidity risk The Group re-arranged its borrowings into a revolving credit facility (£10 million – expiring July 2012) and a fixed-term loan agreement (£12 million – expiring July 2014). Previously the Group had a fixed term loan (£10 million) and an overdraft facility (£12 million). The Group’s policy on liquidity risk is to ensure that sufficient cash is available to fund future operations. The peak level of net debt in the year to March 2010 was £16 million. The Board manages exposure to liquidity risk by maintaining adequate facilities to meet the future needs of the business. Those needs are determined by monitoring forecast and actual cash flows. The Group regularly monitors its performance against its banking covenants to ensure compliance. HORNBY PLC Annual Report & Accounts 2010 41 Notes to the Financial Statements (continued) DERIVATIVE FINANCIAL INSTRUMENTS To manage exposure to foreign currency risk, the Group uses foreign currency forward contracts and a foreign exchange collar, and to manage interest rate risk, the Group uses an interest rate swap, also known as derivative financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of the hedged items. (a) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Statement of Comprehensive Income within operating expenses. Amounts accumulated in equity are recycled in the Statement of Comprehensive Income in the periods when the hedged item affects profit or loss (for instance when the forecast purchase that is hedged takes place). The gain or loss relating to the effective portion of forward foreign exchange contracts hedging import purchases is recognised in the Statement of Comprehensive Income within ‘cost of sales’. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in cost of goods sold in the case of inventory. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the Statement of Comprehensive Income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Statement of Comprehensive Income. (b) Derivatives that do not qualify for hedge accounting Certain derivative instruments including the foreign exchange collar are not considered effective and do not qualify for hedge accounting. Such derivatives are classified as at fair value through the Statement of Comprehensive Income, and changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognised immediately in the Statement of Comprehensive Income. FAIR VALUE ESTIMATION The fair values of short-term deposits, loans and overdrafts with a maturity of less than one year are assumed to be approximate to their book values. The fair values of the derivative financial instruments used for hedging purposes are disclosed in note 19. 42 HORNBY PLC Annual Report & Accounts 2010 FOREIGN CURRENCY Transactions denominated in foreign currencies are recorded in Sterling at the exchange rates ruling at the date of the transaction. Foreign exchange gains and losses resulting from such transactions are recognised in the Statement of Comprehensive Income, except when deferred in equity as qualifying cash flow hedges. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the balance sheet date and any exchange differences are taken to the Statement of Comprehensive Income. Foreign exchange gains/losses relating to foreign currency loans and other foreign exchange adjustments are included within operating profit and shown separately as part of operating income/expenses. On consolidation, Statement of Comprehensive Income and cash flows of foreign subsidiaries are translated into Sterling using average rates that existed during the accounting period. The balance sheets of foreign subsidiaries are translated into Sterling at the rates of exchange ruling at the balance sheet date. Gains or losses arising on the translation of opening and closing net assets are recognised in the Statement of Changes in Equity. DIVIDEND DISTRIBUTION Final dividends are recorded in the financial statements in the period in which they are approved by the Company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid. 2. SEGMENTAL REPORTING Management has determined the operating segments based on the reports reviewed by the Board (chief operating decision-maker) that are used to make strategic decisions. The Board considers the business from a geographic perspective. Geographically, management considers the performance in the UK, US, Spain, Italy and rest of Europe. Although the US segment does not meet the quantitative thresholds required by IFRS 8, management has concluded that this segment should be reported, as it is closely monitored by the Board as it is outside Europe. The Company is a holding company operating in the UK with its results given in the Company Statement of Comprehensive Income on page 28 and its assets and liabilities given in the Company Balance Sheet on page 29. Other Company information is provided in the other notes to the accounts. HORNBY PLC Annual Report & Accounts 2010 43 Notes to the Financial Statements (continued) Year ended 31 March 2010 Revenue – External – Other segments Operating profit/(loss) – External Finance cost – Other Segments Finance income – External – Other segments Profit/(loss) before taxation Analysed as: Underlying profit before taxation Net foreign exchange impact on intercompany loans Amortisation of intangibles Profit before taxation Taxation Profit/(loss) for the year Segment assets Less intercompany receivables Add tax assets Total assets Segment liabilities Less intercompany payables Add tax liabilities Total liabilities Other segment items Capital expenditure Depreciation Net foreign exchange on intercompany loans Amortisation of intangible assets Share-based payment – charge to Statement of Comprehensive Income (note 22) UK £’000 46,451 2,972 4,574 (768) (230) 17 804 4,397 USA £’000 2,763 – (47) – (10) – – (57) Spain £’000 3,559 914 440 (19) (201) 2 – 222 Rest of Europe £’000 6,443 – Total Reportable Segments £’000 64,736 6,478 135 (16) (95) – – 24 6,004 (809) (804) 20 804 5,215 Italy £’000 5,520 2,592 902 (6) (268) 1 – 629 Intra Group £’000 – (6,478) – – 804 – (804) – 4,758 (57) 222 727 58 5,708 (98) (263) 4,397 (1,115) 3,282 57,175 (18,645) 116 38,646 23,653 (788) 960 23,825 2,816 2,984 98 263 289 – – (57) 1 (56) 1,755 – – 1,755 1,819 (1,742) – 77 16 15 – – – – – 222 (71) 151 10,194 (1,314) 141 9,021 8,536 (7,085) 96 1,547 798 572 – – – – (98) 629 (285) 344 12,274 (802) 24 11,496 8,703 (7,569) 241 1,375 384 788 – 98 – – (34) 24 (98) (395) 5,215 (60) (36) (1,530) 3,685 – – – – – – 3,353 (15) 34 3,372 4,426 (3,592) 4 838 84,751 (20,776) 315 64,290 47,137 (20,776) 1,301 27,662 (20,776) 20,776 – – (20,776) 20,776 – – 11 17 – 34 4,025 4,376 98 395 – 289 – – – – – Group £’000 64,736 – 6,004 (809) – 20 – 5,215 5,708 (98) (395) 5,215 (1,530) 3,685 63,975 – 315 64,290 26,361 – 1,301 27,662 4,025 4,376 98 395 289 All transactions between Group companies are on normal commercial terms and an arm’s length basis. 44 HORNBY PLC Annual Report & Accounts 2010 Year ended 31 March 2009 Revenue – – External Other segments Operating profit Finance cost – External – Other Segments Finance income – External – Other segments Profit/(loss) before taxation Analysed as: Underlying profit before taxation Net foreign exchange impact on intercompany loans Amortisation of intangibles Restructuring and abortive due diligence costs Profit before taxation Taxation Profit/(loss) for the year Segment assets Less intercompany receivables Add tax assets Total assets Segment liabilities Less intercompany payables Add tax liabilities Total liabilities Other segment items Capital expenditure (including acquisitions) Depreciation Net foreign exchange on intercompany loans Amortisation of intangible assets Share-based payment – charge to Statement of Comprehensive Income (note 22) UK £’000 43,497 3,582 5,773 (749) (230) 22 1,042 5,858 5,909 535 (247) (339) 5,858 (1,694) 4,164 52,209 (21,045) 67 31,231 22,591 (367) 1,189 23,413 4,422 2,839 (535) 247 224 USA £’000 3,253 – 21 – (16) 3 – 8 8 – – – 8 (4) 4 2,065 (2) – 2,063 2,252 (2,198) 1 55 23 11 – – – Rest of Europe £’000 6,456 – Total Reportable Segments £’000 61,569 6,911 110 (30) (130) – – (50) 6,899 (805) (1,042) 27 1,042 6,121 Italy £’000 4,434 2,553 327 (14) (386) 2 – (71) Intra Group £’000 – (6,911) – – 1,042 – (1,042) – Spain £’000 3,929 776 668 (12) (280) – – 376 412 21 (19) 6,331 – (92) – (71) (16) (87) – (31) – (50) 535 (370) (375) 6,121 (75) (125) (1,909) 4,212 – – – – – – – 12,967 (1,024) 83 12,026 9,997 (8,686) 22 1,333 3,655 (35) 32 3,652 4,601 (3,707) 14 908 80,595 (22,845) 191 57,941 47,932 (22,845) 1,300 26,387 (22,845) 22,845 – – (22,845) 22,845 – – 492 1,200 448 989 – – – – 92 – 21 28 – 31 6,158 4,315 (535) 370 – 224 – – – – – – – (36) 376 (120) 256 9,699 (739) 9 8,969 8,491 (7,887) 74 678 Group £’000 61,569 – 6,899 (805) – 27 – 6,121 6,331 535 (370) (375) 6,121 (1,909) 4,212 57,750 – 191 57,941 25,087 – 1,300 26,387 6,158 4,315 (535) 370 224 All transactions between Group companies are on normal commercial terms and an arm’s length basis. HORNBY PLC Annual Report & Accounts 2010 45 Notes to the Financial Statements (continued) 3. FINANCE (COSTS)/INCOME Finance costs: Interest paid on bank borrowings Interest paid on intercompany borrowings Interest paid on finance leases Finance income: Bank interest Interest received on intercompany loans Dividend received Net finance (costs)/income Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 (798) – (11) (809) 20 – – 20 (789) (793) – (12) (805) 27 – – 27 (778) – (201) – (201) – 228 – 228 27 – (280) – (280) – 190 5,740 5,930 5,650 46 HORNBY PLC Annual Report & Accounts 2010 4. OTHER OPERATING (INCOME)/EXPENSE The following items have been included in arriving at profit before taxation: Staff costs (note 23) Inventories: – Cost of inventories recognised as an expense (included in cost of sales) – Write down (release)/charge Depreciation of property, plant and equipment: – Owned assets – Under finance leases (Profit)/loss on disposal of assets Other operating lease rentals payable: – Plant and machinery – Property Repairs and maintenance expenditure on property, plant and equipment Research and development expenditure Foreign exchange losses/(gains): – On trading transactions – Net impact on intercompany loans Impairment of trade receivables Other operating expenses/(income): – Foreign exchange on trading transactions – Net impact of foreign exchange on intercompany loans – Movement on fair value of ineffective hedge – Share-based payment charge – Amortisation of intangible assets Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 9,875 9,059 947 834 33,814 (34) 32,490 502 4,356 20 (1) 175 411 4,293 22 25 175 417 236 1,220 208 1,429 767 98 95 (1,634) (535) 202 791 98 (24) 289 395 1,549 (1,634) (535) 6 224 370 (1,569) – – 46 – – – – – – – – – – – – 112 – 112 – – 44 – – – – – – – – – – – – 60 – 60 Services provided by the Group’s auditor and network firms During the year the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditors and network firms as detailed below: Fees payable to the Company’s auditors for the audit of parent company and consolidated accounts Fees payable to the Company’s auditors and its associates for other services: – The auditing of accounts of subsidiaries of the Company pursuant to legislation – Other services pursuant to legislation – Services relating to corporate finance transactions – Services relating to taxation Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 87 88 58 19 – 29 193 68 20 173 38 387 12 – 19 – 10 41 12 – 20 147 16 195 In the current financial year the level of non audit fees was well within the 1:1 ratio to audit fees as per Audit committee policy. In the previous financial year the level of non audit fees exceeded the ratio due to due diligence activities, undertaken with the prior approval of the Committee. HORNBY PLC Annual Report & Accounts 2010 47 Notes to the Financial Statements (continued) 5. TAXATION Analysis of tax charge in the year Current tax – UK taxation adjustments in respect of prior years – overseas taxation adjustment in respect of prior years Deferred tax (note 20) – current year – overseas taxation Total tax charge to the Statement of Comprehensive Income Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 1,203 (27) 436 9 1,621 (61) (30) (91) 1,530 1,671 1 228 – 1,900 22 (13) 9 1,909 144 (29) (5) 9 119 (17) – (17) 102 104 (2) (8) – 94 24 – 24 118 The tax for the year differs to the standard rate of corporation tax in the UK (28%). Any differences are explained below: Profit before taxation Profit on ordinary activities multiplied by rate of corporation tax in UK of 28% (2009 – 28%) Effects of: Adjustment to tax in respect of prior years Income not taxable Difference on overseas rates of tax Impact of overseas losses not recognised Other Total taxation 6. DIVIDENDS Group Company 2010 £’000 5,215 2009 £’000 6,121 2010 £’000 384 2009 £’000 5,983 1,460 1,714 108 1,675 (18) – 76 42 (30) 1,530 1 – 24 118 52 1,909 (20) – – – 14 102 (2) (1,607) – – 52 118 No final paid per share in relation to year ended 31 March 2009 (2009 – paid 5.8p per share in relation to year ended 31 March 2008) No interim paid per share in relation to year ended 31 March 2010 (2009 – paid 2.7p per share in relation to year ended 31 March 2009) Group and Company 2010 £’000 2009 £’000 – – – 2,187 1,018 3,205 In addition, the directors are proposing a final dividend in respect of the financial year ended 31 March 2010 of 5.0p per share which will absorb £1,903,205 of shareholders’ funds to be paid on 20 August 2010 to shareholders who are on the register of members on 16 July 2010. 48 HORNBY PLC Annual Report & Accounts 2010 7. EARNINGS PER SHARE Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share trust (note 22) which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares that have satisfied the appropriate performance criteria at 31 March 2010. Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below. Reported Basic EPS Earnings attributable to ordinary shareholders Effect of dilutive securities Options Diluted EPS Underlying Earnings attributable to shareholders Amortisation of intangibles Net foreign exchange translation adjustments net of tax Restructuring and abortive due diligence costs Underlying basic EPS Underlying diluted EPS 2010 Weighted average number of shares 000’s Earnings £’000 Per-share amount pence Earnings £’000 2009 Weighted average number of shares 000’s Per-share amount pence 3,685 37,772 9.76 4,212 37,724 11.17 602 38,374 (0.16) 9.60 3,685 627 38,351 (0.19) 10.98 4,212 3,685 395 71 – 4,151 4,151 37,772 37,772 38,374 9.76 1.04 0.19 – 10.99 10.82 4,212 370 (385) 301 4,498 4,498 37,724 37,724 38,351 11.17 0.98 (1.02) 0.79 11.92 11.73 HORNBY PLC Annual Report & Accounts 2010 49 Notes to the Financial Statements (continued) 8. GOODWILL GROUP COST At 1 April 2009 Exchange adjustments At 31 March 2010 AGGREGATE IMPAIRMENT At 1 April 2009 and 31 March 2010 Net book amount at 31 March 2010 GROUP COST At 1 April 2008 Additions Exchange adjustments At 31 March 2009 AGGREGATE IMPAIRMENT At 1 April 2008 and 31 March 2009 Net book amount at 31 March 2009 £’000 13,624 (208) 13,416 – 13,416 £’000 9,925 2,915 784 13,624 – 13,624 Annual impairment reviews performed have not identified any impairment of goodwill. The goodwill has been allocated to cash-generating units and a summary of carrying amounts of goodwill by geographical segments (representing cash-generating units) at 31 March 2010 is as follows: GROUP At 31 March 2010 At 31 March 2009 UK £’000 3,992 3,992 USA £’000 8 10 Spain £’000 3,990 3,990 Italy £’000 4,846 5,032 Rest of Europe £’000 580 600 Total £’000 13,416 13,624 Goodwill allocated to the above cash-generating units of the Group has been measured based on synergies each geographical segment is expected to gain from the business combination. The key assumptions in the value in use calculation: – – – Budgeted revenue growth was based on expected levels of activity given results to date, together with growth based upon internal improvements, marketing initiatives, and expected economic and market conditions. Budgeted operating profit was calculated based upon management’s expectation of operating costs appropriate to the growing business. The relative risk adjusted (or ‘beta’) discount rates applied to reflect the risk inherent in hobby based product companies. In determining the risk adjusted discount rate, management has applied an adjustment for risk of such companies in the industry on average determined using the betas of comparable hobby based product companies. The forecasts are based on approved budgets for the year ending 31 March 2011. Subsequent cash flows have been increased in line with historic local territory gross domestic product. For cash flows after 5 years, growth is no higher than long-term growth rate for each country. No reasonable probable change in assumptions would give rise to any impairment. The cash flows were discounted using a pre-tax discount rate of around 12% which management believes is appropriate for all territories due to a similar risk profile. 50 HORNBY PLC Annual Report & Accounts 2010 9. INTANGIBLE ASSETS GROUP ACQUIRED INTANGIBLE ASSETS COST At 1 April 2009 Exchange adjustments At 31 March 2010 ACCUMULATED AMORTISATION At 1 April 2009 Charge for the year Exchange adjustments At 31 March 2010 Net book amount at 31 March 2010 COST At 1 April 2008 Acquisitions Exchange adjustments At 31 March 2009 ACCUMULATED AMORTISATION At 1 April 2008 Charge for the year Exchange adjustments At 31 March 2009 Net book amount at 31 March 2009 Net book amount at 31 March 2008 Brand names £’000 Customer lists £’000 Rent free period £’000 Total £’000 5,083 (68) 5,015 574 250 (13) 811 4,204 2,151 2,676 256 5,083 290 234 50 574 4,509 1,861 1,473 (18) 1,455 293 145 (6) 432 1,023 679 729 65 1,473 136 136 21 293 1,180 543 37 (1) 36 37 – (1) 36 – 32 – 5 37 32 – 5 37 – – 6,593 (87) 6,506 904 395 (20) 1,279 5,227 2,862 3,405 326 6,593 458 370 76 904 5,689 2,404 All amortisation charges in the year have been charged through other operating expenses. HORNBY PLC Annual Report & Accounts 2010 51 Notes to the Financial Statements (continued) 10. PROPERTY, PLANT AND EQUIPMENT GROUP COST At 1 April 2009 Exchange adjustments Additions at cost Disposals At 31 March 2010 ACCUMULATED At 1 April 2009 Exchange adjustments Charge for the year Disposals At 31 March 2010 Net book amount at 31 March 2010 GROUP COST At 1 April 2008 Exchange adjustments Additions at cost Acquisitions Disposals At 31 March 2009 ACCUMULATED DEPRECIATION At 1 April 2008 Exchange adjustments Charge for the year Disposals At 31 March 2009 Net book amount at 31 March 2009 Freehold land and buildings £’000 Plant and equipment £’000 Motor vehicles £’000 Tools and moulds £’000 3,057 (24) – – 3,033 1,100 (4) 56 – 1,152 1,881 4,681 (38) 294 (12) 4,925 2,945 (21) 380 (11) 3,293 1,632 382 (2) 45 (7) 418 223 (1) 36 (7) 251 167 Total £’000 45,452 (318) 4,025 (181) 48,978 37,332 (254) 3,686 (162) 40,602 DEPRECIATION 34,929 (167) 4,376 (180) 38,958 10,020 30,661 (141) 3,904 (162) 34,262 6,340 Freehold land and buildings £’000 Plant and equipment £’000 Motor vehicles £’000 Tools and moulds £’000 2,919 87 51 – – 3,057 1,032 14 54 – 1,100 1,957 5,137 130 549 – (1,135) 4,681 3,643 84 353 (1,135) 2,945 1,736 268 8 114 – (8) 382 194 2 35 (8) 223 159 31,176 739 4,012 1,432 (27) 37,332 26,271 517 3,873 – 30,661 6,671 Total £’000 39,500 964 4,726 1,432 (1,170) 45,452 31,140 617 4,315 (1,143) 34,929 10,523 At 31 March 2008 1,887 1,494 74 4,905 8,360 Freehold land amounting to £786,000 (2009 – £786,000) has not been depreciated. 52 HORNBY PLC Annual Report & Accounts 2010 Assets held by the Group under finance leases have the following net book amount: Cost Aggregate depreciation Net book amount 2010 £’000 167 (61) 106 2009 £’000 167 (41) 126 Assets held by the Group under finance leases are motor vehicles. The Group has taken advantage of the exemption under IFRS 1 to use the valuation of certain land and buildings at the date of transition as deemed cost. All other assets are stated at cost. COMPANY COST At 1 April 2009 Additions At 31 March 2010 ACCUMULATED DEPRECIATION At 1 April 2009 Charge for the year At 31 March 2010 Net book amount at 31 March 2010 COMPANY COST At 1 April 2008 Additions At 31 March 2009 ACCUMULATED DEPRECIATION At 1 April 2008 Charge for the year At 31 March 2009 Net book amount at 31 March 2009 At 31 March 2008 The Company does not hold any assets under finance leases. Freehold land and buildings £’000 Plant and equipment £’000 2,428 – 2,428 996 45 1,041 1,387 4 – 4 3 1 4 – Freehold land and buildings £’000 Plant and equipment £’000 2,377 51 2,428 952 44 996 1,432 1,425 4 – 4 3 – 3 1 1 Total £’000 2,432 – 2,432 999 46 1,045 1,387 Total £’000 2,381 51 2,432 955 44 999 1,433 1,426 HORNBY PLC Annual Report & Accounts 2010 53 Notes to the Financial Statements (continued) 11. INVESTMENTS COMPANY The movements in the net book value of interests in subsidiary undertakings are as follows: At 1 April 2009 Capital contribution relating to share-based payment Net increase in loans to subsidiary undertakings At 31 March 2010 At 1 April 2008 Capitalisation of subsidiary Capital contribution relating to share-based payment Net increase in loans to subsidiary undertakings At 31 March 2009 Interests in subsidiary undertakings at valuation £’000 27,931 177 – 28,108 Loans to subsidiary undertakings at cost £’000 5,058 – 592 5,650 25,985 1,782 164 – 27,931 4,103 – – 955 5,058 Total £’000 32,989 177 592 33,758 30,088 1,782 164 955 32,989 Interest was charged on loans to subsidiary undertakings at Euribor + 2% pa, subsequently increased to Sterling 3-month Libor + 3.6%. Loans are unsecured and exceed five years maturity. PRINCIPAL GROUP SUBSIDIARY UNDERTAKINGS Details of the principal subsidiary undertakings of the Company, which are included in the consolidated financial statements, are set out below. Hornby Hobbies Limited, Hornby España S.A. and Hornby Italia s.r.l. are engaged in the development, design, sourcing and distribution of models. Hornby America Inc., Hornby France S.A.S. and Hornby Deutschland GmbH are distributors of models. Hornby Hobbies Limited Hornby America Inc. Hornby España S.A Hornby Italia s.r.l. Hornby France S.A.S. Hornby Deutschland GmbH Country of incorporation Description of shares held Proportion of nominal value of issued shares held Group Company Great Britain USA Spain Italy France Germany Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares % 100 100 100 100 100 100 % 100 100 100 100 100 100 54 HORNBY PLC Annual Report & Accounts 2010 12. INVENTORIES Raw materials Work in progress Finished goods 13. TRADE AND OTHER RECEIVABLES CURRENT: Trade receivables Less: provision for impairment of receivables Trade receivables – net Other receivables Prepayments Group Company 2010 £’000 287 38 11,948 12,273 2009 £’000 534 103 13,731 14,368 2010 £’000 – – – – 2009 £’000 – – – – Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 11,859 (284) 11,575 343 1,373 13,291 12,370 (338) 12,032 171 916 13,119 – – – – 40 40 – – – – 8 8 Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. Due to this, management believes there is no further credit risk provision required in excess of the normal provision for doubtful receivables. Credit insurance policies are in place in Hornby Hobbies Limited, Hornby America Inc., Hornby España S.A., Hornby Italia s.r.l., Hornby France S.A.S. and Hornby Deutschland GmbH covering trade receivables at 31 March 2010 to the value of £9.5 million (2009 – £10.4 million). Gross trade receivables can be analysed as follows: Fully performing Past due Impaired Trade receivables 2010 £’000 10,250 1,263 346 11,859 2009 £’000 10,199 1,701 470 12,370 HORNBY PLC Annual Report & Accounts 2010 55 Notes to the Financial Statements (continued) As of 31 March 2010, trade receivables of £1,263,000 (2009 – £1,701,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: 1 – 120 days > 120 days 2010 £’000 1,135 128 1,263 2009 £’000 1,549 152 1,701 As of 31 March 2010, trade receivables of £346,000 (2009 – £470,000) were impaired and provided for. The amount of provision was £284,000 (2009 – £338,000) as of 31 March 2010. Significant financial difficulties of the receivable, probability that the receivable will enter bankruptcy or financial reorganisation are considered indications that the trade receivable is impaired. The ageing of these receivables is as follows: 1 – 120 days > 120 days Movements on the Group provision for impairment of trade receivables are as follows: At 1 April Provision for receivables impairment Receivables written off during the year as uncollectible Exchange adjustments At 31 March 2010 £’000 90 256 346 2010 £’000 338 95 (139) (10) 284 2009 £’000 190 280 470 2009 £’000 203 202 (107) 40 338 The charge relating to the increase in provision has been included in ‘administrative expenses’ in the Statement of Comprehensive Income. The carrying amounts of the Group and Company trade and other receivables are denominated in the following currencies: Sterling Euro US dollar HK dollar Group Company 2010 £’000 7,862 4,780 536 113 13,291 2009 £’000 6,638 5,791 457 233 13,119 2010 £’000 40 – – – 40 2009 £’000 7 1 – – 8 56 HORNBY PLC Annual Report & Accounts 2010 14. CASH AND CASH EQUIVALENTS Cash at bank and in hand 15. TRADE AND OTHER PAYABLES CURRENT: Trade payables Other taxes and social security Other payables Accruals 16. PROVISIONS Sales returns At 1 April Charged to Statement of Comprehensive Income revenue Utilised in year At 31 March Group Company 2010 £’000 8,998 2009 £’000 427 2010 £’000 45 2009 £’000 8 Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 5,246 1,359 1,940 1,818 10,363 3,935 1,024 1,955 1,356 8,270 – 10 – 298 308 – 15 – 143 158 Group 2010 £’000 Company 2009 £’000 2010 £’000 2009 £’000 538 927 (1,074) 391 500 1,050 (1,012) 538 – – – – – – – – Provision is made for future sales returns based on historical trends. The provision is expected to be utilised within one year from the balance sheet date. 17. CURRENT TAX ASSETS & LIABILITIES Current tax assets Corporation tax recoverable – overseas Current tax liabilities UK Corporation tax liability Overseas Corporation tax liability Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 175 124 141 693 327 1,020 910 89 999 – 144 144 9 – – – HORNBY PLC Annual Report & Accounts 2010 57 Notes to the Financial Statements (continued) 18. BORROWINGS Secured borrowing at amortised cost Bank overdrafts Bank loan Finance leases Loan from subsidiary undertakings Total borrowings Amount due for settlement within 12 months Amount due for settlement after 12 months The Group complied with all loan covenants during the year. Analysis of borrowings by currency: Group 31 March 2010 Bank overdrafts Bank loan Finance leases 31 March 2009 Bank overdrafts Bank loan Finance leases Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 119 12,033 113 – 12,265 1,718 10,547 12,265 3,487 8,700 132 – 12,319 5,138 7,181 12,319 – – – 5,373 5,373 – 5,373 5,373 – – – 5,580 5,580 – 5,580 5,580 Sterling £’000 Euros £’000 Total £’000 – 11,500 113 11,613 3,432 8,700 132 12,264 119 533 – 652 55 – – 55 119 12,033 113 12,265 3,487 8,700 132 12,319 The other principal features of the Group’s borrowings are as follows: At 31 March 2010 the Group had a revolving credit facility of £10 million expiring July 2012 and a 5-year fixed term loan agreement of £12 million with repayments scheduled to July 2014. The future interest rates of these facilities are Libor + 2.85% for the revolving credit facility and Libor + 3.6% for the fixed term loan. The average effective interest rate on bank overdrafts approximated to 2.35% (2009 – 4.52%) per annum and is determined based on 1.0% above 3-month Libor. The weighted average interest rates paid during the year were as follows: Bank overdrafts 2010 % 2.35 2009 % 4.52 Undrawn borrowing facilities At 31 March 2010, the Group had available £10.3 million (2009 – £4.1 million) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. In addition, European subsidiaries had available £3.7 million (2009 – £3.1 million) of undrawn import credit line facilities that could be obtained with security being given against trade receivables. 58 HORNBY PLC Annual Report & Accounts 2010 19. FINANCIAL INSTRUMENTS The Group’s policies and strategies in relation to risk and financial instruments are explained in the Directors’ Report. Accounting policies used to account for financial instruments are detailed in note 1. Group Carrying values of derivative financial instruments Foreign exchange collar Forward foreign currency contracts – cash flow hedges – cash flow hedge Interest rate swap Assets Liabilities 2010 £’000 2009 £’000 2010 £’000 2009 £’000 – 750 – 750 – – – – (2,774) (51) (517) (3,342) (3,270) (259) (431) (3,960) The hedged forecast transactions denominated in foreign currency are expected to occur at various dates during the next 12 months. Gains and losses recognised in reserves on forward foreign exchange contracts as of 31 March 2010 are recognised in the Statement of Changes in Equity in the period or periods during which the hedged forecast transaction affects the Statement of Comprehensive Income, which is within 12 months from the balance sheet date. At 31 March 2010 outstanding forward currency contracts were as follows: Hong Kong $ US$ Euros 2010 000’s 145,986 5,190 871 2009 000’s 125,000 116 445 The notional principal amount of the outstanding interest rate swap contract at 31 March 2010 was £4.6 million (2009 – £8.7 million). At 31 March 2010, the interest rate swap fixes the interest rate on £4.6 million of the bank loan disclosed in note 18 to 6.22%. The loss recognised in the interest rate swap included in the hedging reserve as of 31 March 2010 will be continuously released to the Statement of Comprehensive Income until the maturity of the swap. The £6.9 million remainder of the bank loan disclosed in note 18 incurs interest based on 3-month Libor established quarterly in advance. The total fair value above for forward foreign currency contracts and the interest rate swap comprises £182,000 asset (2009 – £690,000 liability), £168,000 asset (2009 – £680,000 liability) has been effectively hedged at 31 March 2010 and therefore charged to reserves in accordance with IAS 39. The asset balance of £14,000 (2009 – £10,000 liability) was the ineffective hedged portion and was included within operating expenses. In accordance with IAS 39, the Group has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard. No embedded derivatives have been identified. All derivative financial investments are Level 2 in the Fair Value Hierarchy. HORNBY PLC Annual Report & Accounts 2010 59 Notes to the Financial Statements (continued) Fair values of non-derivative financial assets and liabilities For the Group and the Company, as at 31 March 2010 and 31 March 2009, there is no difference between the carrying amount and fair value of each of the following classes of financial assets and liabilities, principally due to their short maturity: investments, trade and other receivables, cash at bank and in hand, trade and other payables and current borrowings. Bank deposits attract interest within 0.5% of the ruling market rate. There is no significant difference between the fair value and carrying amount of non-current borrowings as the impact of discounting is not significant. The Company has no derivative financial instruments. Maturity of non-current financial liabilities GROUP Between one and two years (note 18) Between two and five years (note 18) Between one and two years (note 18) Between two and five years (note 18) COMPANY More than five years (note 18) The minimum lease payments under finance leases fall due as follows: GROUP Not later than one year Later than one year but not more than five Future finance charges on finance leases Present value of finance lease liabilities Bank loan £’000 2,724 7,757 10,481 Bank loan £’000 2,176 4,892 7,068 Finance leases £’000 18 48 66 Finance leases £’000 47 66 113 2010 Debt £’000 5,373 2010 £’000 52 68 120 (7) 113 2010 Total £’000 2,742 7,805 10,547 2009 Total £’000 2,223 4,958 7,181 2009 Debt £’000 5,580 2009 £’000 30 120 150 (18) 132 60 HORNBY PLC Annual Report & Accounts 2010 Financial Instruments Interest rate sensitivity The Group is exposed to interest rate risk as the Group borrows funds at both fixed and floating interest rates. The exposure to these borrowings varies during the year due to the seasonal nature of cash flows relating to sales. In order to measure risk, floating rate borrowings and the expected interest cost is forecast on a monthly basis and compared to budget using management’s expectations of a reasonably possible change in interest rates. The effect on both income and equity based on exposure to borrowings at the balance sheet date for a 1% increase in interest rates is £117,000 (2009 – £132,000), before tax. A 1% fall in interest rates give the same but opposite effect. 1% increase in interest rates Borrowings Income and Equity Sensitivity 2010 £’000 117 2009 £’000 132 Foreign currency sensitivity The Group is primarily exposed to US Dollars, Hong Kong Dollars and the Euro. The following table details how the Group’s income and equity would increase on a before tax basis, given a 10% revaluation in the respective currencies against £ and in accordance with IFRS 7 all other variables remaining constant. A 10% devaluation in the value of £ would have the opposite effect. The 10% change represents a reasonably possible change in the specified foreign exchange rates in relation to £. US and HK dollars Euros Income and Equity Sensitivity 2010 £’000 911 343 1,254 2009 £’000 1,131 215 1,346 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings as shown in the consolidated balance sheet less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the balance sheet plus net debt. Total borrowings (note 18) Less: Total cash and cash equivalents (note 14) Net Debt Total Equity Total Capital Gearing 2010 £’000 12,265 2009 £’000 12,319 (8,998) 3,267 36,628 39,895 8% (427) 11,892 31,554 43,446 27% HORNBY PLC Annual Report & Accounts 2010 61 Notes to the Financial Statements (continued) 20. DEFERRED TAX Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 28% (2009 – 28%). The movement on the deferred tax account is as shown below: At 1 April Charge to Statement of Comprehensive Income (note 5) – origination and reversal of temporary differences Exchange adjustments At 31 March Group Company 2010 £’000 234 (91) (2) 141 2009 £’000 223 9 2 234 2010 £’000 183 (19) 2 166 2009 £’000 159 24 – 183 Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets because it is probable that those assets will be recovered. No deferred tax is provided for tax liabilities which would arise on the distribution of profits retained by overseas subsidiaries because there is currently no intention that such profits will be remitted. The movements in deferred tax assets and liabilities during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset. Deferred tax liabilities At 1 April 2009 Credit to Statement of Comprehensive Income At 31 March 2010 At 1 April 2008 Credit to Statement of Comprehensive Income At 31 March 2009 Group Accelerated capital allowances £’000 91 Revaluation £’000 188 Other £’000 22 Total £’000 301 Revaluation £’000 188 Company Accelerated capital allowances £’000 13 (5) 183 193 (5) 188 (7) 84 120 (29) 91 (8) 14 33 (11) 22 (20) 281 346 (45) 301 (5) 183 193 (5) 188 – 13 13 – 13 Total £’000 201 (5) 196 206 (5) 201 Of the total deferred tax liability of £281,000, £5,000 was due within one year for the Group (2009 – £5,000) and £5,000 for the Company (2009 – £5,000). 62 HORNBY PLC Annual Report & Accounts 2010 Deferred tax assets GROUP At 1 April 2009 Credit to Statement of Comprehensive Income At 31 March 2010 At 1 April 2008 Charge/(credit) to Statement of Comprehensive Income At 31 March 2009 Net deferred tax liability At 31 March 2010 At 31 March 2009 Short-term incentive plan £’000 Group Aquisition intangibles £’000 Company Short-term incentive plan £’000 Other £’000 Total £’000 (45) (23) (68) (122) 77 (45) – (48) (48) – – – (22) (2) (24) (1) (21) (22) (67) (73) (140) (123) 56 (67) 141 234 (18) (12) (30) (47) 29 (18) 166 183 The deferred tax liability arising on the revaluation of freehold land and buildings in 1986 cannot be offset against deferred tax assets. Therefore, the deferred tax asset and deferred tax liability at 31 March 2010 and 31 March 2009 have been recognised separately. GROUP Deferred tax comprises: Accelerated capital allowances Other temporary differences Overseas taxation Deferred tax liability COMPANY Deferred tax comprises: Accelerated capital allowances Other timing differences Deferred tax liability 2010 2009 Recognised £’000 Not recognised £’000 Recognised £’000 Not recognised £’000 84 67 (10) 141 – – – – 91 121 22 234 – – – – 2010 2009 Recognised £’000 Not recognised £’000 Recognised £’000 Not recognised £’000 13 153 166 – – – 13 170 183 – – – HORNBY PLC Annual Report & Accounts 2010 63 Notes to the Financial Statements (continued) 21. SHARE CAPITAL GROUP AND COMPANY Authorised: 50,000,000 (2009 – 50,000,000) ordinary shares of 1p each Allotted and fully paid: Ordinary shares of 1p each At 1 April Allotted under share option schemes At 31 March 2010 £’000 2009 £’000 500 500 2010 2009 Number of shares 37,989,100 75,000 38,064,100 £’000 380 – 380 Number of shares 37,989,100 – 37,989,100 £’000 380 – 380 At 31 March 2010 options granted under the Company’s share option schemes were outstanding as follows: Date granted 28 March 2002 19 June 2002 09 June 2005 14 September 2007 03 December 2007 Number of options 2010 1,000,000 547,500 400,000 228,967 – 2,176,467 2009 1,000,000 622,500 550,000 300,395 118,110 2,591,005 Exercise price Period of option 76.8p March 2005 – March 2012 June 2005 – June 2012 83.4p June 2008 – June 2012 201.0p Sept 2010 – Sept 2017 252.0p Dec 2010 – Dec 2017 254.0p The total number of options outstanding as at the date of this document represent approximately 5.7% (2009 – 6.8%) of the issued share capital of the Company. If Resolution 11 is passed at the Annual General Meeting and the Company were to exercise the full authority to buy–back approximately 10% of the issued ordinary shares of the Company, such options would represent 6.4% (2009 – 7.6%) of the issued share capital of the Company. 64 HORNBY PLC Annual Report & Accounts 2010 22. SHARE-BASED PAYMENTS Hornby Plc operates three share-based plans – Share Option Scheme (‘SOS’), Short Term Incentive Plan (‘STIP’) and Performance Share Plan (‘PSP’). SOS awards The SOS awards are a reward of share options to executive directors and senior management that vest after 3 years and must be exercised in a 4 or 7 year exercise window. The awards are subject to a performance measure of Profits before Interest and Tax (‘PBIT’) or Profit before Tax (‘PBT’) as disclosed by the Group’s accounts for any of the years ended 31 March 2006, 31 March 2007, 31 March 2008, 31 March 2009 or 31 March 2010 excluding (i) any profit or loss in relation to property transactions, (ii) any restructuring and abortive due diligence costs and (iii) any profits or losses arising from businesses acquired by the Group after the date of grant of the Option. Some awards are subject to achieving a PBIT that is equal to or greater than £8 million, or to PBT being equal to or greater than £9 million or aggregate PBT for 3 years ending 31 March 2008, 2009 and 2010 being equal to or greater than £32.7 million. The awards are equity settled. Activity relating to share options for the year ended 31 March 2010 and 31 March 2009 was as follows: Outstanding at 1 April Exercised Lapsed Outstanding at 31 March 2010 2009 Weighted average exercise price 133.1p 83.4p 230.2p 119.7p Number 2,591,005 (75,000) (339,538) 2,176,467 Weighted average exercise price 133.1p – – 133.1p Number 2,591,005 – – 2,591,005 Options were exercised on 4 August 2009. The weighted average share price during the year was 128.3p (2009 - 129.3p). The following table summarises information relating to the number of shares under option (SOS awards) and those which were exercisable at 31 March 2010. Range of exercise prices £0.70 – £0.80 £0.80 – £0.90 £2.00 – £2.10 £2.50 – £2.60 Weighted average remaining contractual life Months 24 27 27 88 Options exercisable at 31 March 2010 Number 1,000,000 547,500 400,000 – 1,947,500 Options exercisable at 31 March 2009 Number 1,000,000 622,500 550,000 – 2,172,500 Total shares under option Number 1,000,000 547,500 400,000 228,967 2,176,467 Exercisable weighted average exercise price for options exercisable at 31 March 2010 76.8p 83.4p 201.0p 104.2p STIP awards The STIP is a reward of shares to executive directors and senior management. Vesting of the awards occurs in equal amounts on the second, third and fourth anniversaries of the award date provided that the participant remains employed by the Group. These awards are not subject to any performance conditions. The awards are equity settled. HORNBY PLC Annual Report & Accounts 2010 65 Notes to the Financial Statements (continued) Performance Share Plan All Performance Share Plan (PSP) awards outstanding at 31 March 2010 vest only if performance conditions are met. Awards granted under the PSP must be exercised within one year of the relevant award vesting date. The Group operates the PSP for executive directors and senior executives. Awards under the scheme are granted in the form of a nil-priced option, and are satisfied using market-purchased shares. The awards vest in full or in part dependent on the satisfaction of specified performance targets. 50% of the award vests dependent on TSR performance over a three year performance period, relative to the constituents of the FTSE Small Cap Index (excluding investment trusts) from the time of grant, and the remaining 50% vests dependent on performance against earnings per share targets. All plans are subject to continued employment. To the extent that such shares in the above plans are awarded to employees below fair value, a charge calculated in accordance with IFRS 2 ‘Share-based payment’ is included within other operating expenses in the Statement of Comprehensive Income. This charge for the Group amounted to £289,000 in the year ended 31 March 2010 (2009 – £224,000) and the Company £112,000 in the year ended 31 March 2010 (2009 – £60,000). The following table summarises the key assumptions used for grants during the year: Fair value (p) Options pricing model used Share price at grant date (p) Exercise price (p) Expected volatility (%) Risk-free rate (%) Expected option term (years) Expected dividends (per year, %) * Assumptions for TSR component only. 2010 2009 SOS – – – – – – – – STIP – – – – – – – – PSP* 110.1p Stochastic 136.3p n/a 44.0% n/a 3 0% SOS – – – – – – – – STIP – – – – – – – – PSP* 81.5p Stochastic 150.0p n/a 33.0% n/a 3 0% Assumptions on expected volatility and expected option term have been made on the basis of historical data, wherever available, for the period corresponding with the vesting period of the option. Best estimates have been used where historical data is not available in this respect. The Group reported a provision for National Insurance and other social security taxes of £4,087 (2009 – £5,324) in respect of liabilities arising from the above share-based payment transactions. GROUP – SHORT TERM INCENTIVE PLAN At 1 April Shares acquired in Company Shares vested At 31 March 2010 £’000 497 – (171) 326 2009 £’000 507 284 (294) 497 Details of the Short Term Incentive Plan are given in the Directors’ Remuneration Report on pages 19 to 24. The Employee Benefit Trust acquired no ordinary shares in the year. On 22 June 2009, the final third of the 2005 allocation (52,346 ordinary shares) and the second third of the 2006 allocation (20,833 ordinary shares) were vested. At 31 March 2010, a total of 194,131 (2009 – 267,310) ordinary shares are held by the Trust and allotted to the directors and senior management under the plan with a nominal value of £1,941 (2009 – £2,673) and a market value of £245,090 (2009 – £182,439). The costs of the plan are borne by Hornby Plc. The Trust has waived its right to dividends. 66 HORNBY PLC Annual Report & Accounts 2010 23. EMPLOYEES AND DIRECTORS Staff costs for the Group during the year: Wages and salaries Share-based payments (note 23) Social security costs Other pension costs (note 24) Redundancy and compensation for loss of office Group Company 2010 £’000 2009 £’000 2010 £’000 2009 £’000 7,735 289 1,135 682 34 9,875 7,360 224 781 540 154 9,059 674 112 103 58 – 947 611 60 69 58 36 834 Average monthly number of people (including executive directors) employed by the Group: Operations Sales, marketing and distribution Administration Key management compensation: Salaries and short-term benefits Share-based payments Post-employment benefits Group Company 2010 Number 99 103 37 239 2009 Number 94 99 47 240 2010 Number – 1 3 4 2009 Number – 1 4 5 Group Company 2010 £’000 2,091 276 192 2,559 2009 £’000 2,071 206 185 2,462 2010 £’000 600 112 58 770 2009 £’000 492 60 51 603 Key management comprise the individuals involved in major strategic decision making and includes all Group and subsidiary directors. A detailed numerical analysis of directors’ remuneration and share options showing the highest paid director, number of directors accruing benefit under money purchase pension schemes and gains realised on the exercise of share options, is included in the Directors’ Remuneration Report on pages 19 to 24 and forms part of these financial statements. HORNBY PLC Annual Report & Accounts 2010 67 Notes to the Financial Statements (continued) 24. PENSION COMMITMENTS The Group operates a defined contribution pension scheme by way of a Stakeholder Group Personal Pension Plan set up through the Friends Provident Insurance Group. Alexander Forbes Financial Services Limited is appointed as Independent Financial Advisers to work in liaison with the Company. The level of contributions to the Group Personal Pension Plan for current members is fixed by the Company. The Group pension cost for the year was £682,000 (2009 – £540,000) representing the actual contributions payable in the year and certain scheme administration costs. The Company pension cost for the year was £58,000 (2009 – £58,000). 25. FINANCIAL COMMITMENTS CAPITAL COMMITMENTS At 31 March commitments were: Contracted for but not provided for The Company does not have any capital commitments. The commitments relate to the acquisition of property, plant and equipment. Group 2010 £’000 2009 £’000 1,245 1,292 CONTINGENT LIABILITIES The Company and its subsidiary undertakings are, from time to time, parties to legal proceedings and claims, which arise in the ordinary course of business. The directors do not anticipate that the outcome of these proceedings and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position. 26. OPERATING LEASE COMMITMENTS The total of future minimum lease payments in respect of non-cancellable plant and motor vehicle operating leases falling due are as follows: GROUP Not later than one year Later than one year but not more than five years More than five years 2010 £’000 505 639 – 1,144 2009 £’000 472 1,115 64 1,651 27. RELATED PARTY DISCLOSURES There were no contracts with the Company or any of its subsidiaries existing during or at the end of the financial year in which a director of the Company was materially interested. The Group has taken advantage of the exemption available under IAS 24 ‘Related party disclosures’ not to disclose transactions and balances between Group entities that have been eliminated on consolidation. The Company received management fees from subsidiaries of £1,361,000 (2009 – £1,540,000), interest of £228,000 (2009 – £190,000) and dividends from subsidiaries of £nil (2009 – £5,740,000). 68 HORNBY PLC Annual Report & Accounts 2010 Notice of Annual General Meeting If you have sold or otherwise transferred all of your Ordinary Shares in Hornby Plc, please forward this document as soon as possible to the purchaser or transferee, or to the stockbroker, bank or other agent through or to whom the sale or transfer was effected for transmission to the purchaser or transferee of your Ordinary Shares. NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the twenty-ninth Annual General Meeting of Hornby Plc (the “Company”) will be held at Hornby Plc, Ramsgate Road, Westwood, Margate, Kent CT9 4JX on Thursday 29 July 2010 at 11.00am for the following purposes: To consider and if thought fit, to pass the following resolutions, of which numbers 1 to 9 will be proposed as ordinary resolutions and numbers 10 and 11 as special resolutions. ORDINARY RESOLUTIONS 1. To receive and adopt the Annual Report and Accounts for the financial year ended 31 March 2010 together with the Report of the Directors and Auditors. 2. To approve the Directors’ Remuneration Report, as set out on pages 19 to 24 of the Company’s Annual Report and Accounts, for the financial year ended 31 March 2010. 3. To re-elect N A Johnson as a Director. 4. To re-elect A J Morris, who retires by rotation, as a Director. 5. To re-elect M E Rolfe, who retires by rotation, as a Director. 6. To re-appoint PricewaterhouseCoopers LLP, the retiring auditors, as auditors of the Company to hold office from conclusion of the Annual General Meeting to the conclusion of the next meeting at which accounts are laid before the Company. 7. To authorise the Directors to agree the auditors’ remuneration. 8. That, in accordance with section 366 of the Companies Act 2006 (the “Act”), the Company and all companies that are its subsidiaries at any time during the period for which this resolution has effect be authorised to: (a) make political donations to political parties and/or independent election candidates, not exceeding £10,000 in total; (b) make political donations to political organisations, other than political parties, not exceeding £10,000 in total; and (c) incur political expenditure, not exceeding £10,000 in total, during the period beginning with the date of the passing of this resolution and ending on the date of the Company’s next Annual General Meeting. For the purpose of this resolution, the terms ‘political donations’, ‘political expenditure’, ‘independent election candidates’, ‘political parties’ and ‘political organisations’ shall have the meaning given to them by Part 14 of the Act. 9. THAT, in place of the equivalent authority given to the Directors at the last AGM (but without prejudice to the continuing authority of the Directors to allot shares pursuant to an offer or agreement made by the Company before the expiry of the authority pursuant to which such offer or agreement was made), the Directors be generally and unconditionally authorised in accordance with section 551 of the Act to allot shares in the Company or grant rights to subscribe for or to convert any security into shares in the Company up to a maximum aggregate nominal amount of £125,000, such authority shall expire on 28 July 2015 but so that the Company may, before the expiry of such period, make an offer or agreement which would or might require relevant securities to be allotted after the expiry of such period and the Directors may allot relevant securities pursuant to such an offer or agreement as if the authority had not expired. HORNBY PLC Annual Report & Accounts 2010 69 Notice of Annual General Meeting (continued) SPECIAL RESOLUTIONS 10. THAT, subject to and conditional on the passing of resolution 9, the Directors be empowered, pursuant to section 570 of the Act, to allot equity securities (within the meaning of section 560 of the Act) for cash pursuant to the authority conferred by resolution 9 as if section 561 of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment of equity securities: (a) in connection with an offer of such securities by way of rights issue; and (b) otherwise than pursuant to sub-paragraph 10(a) above up to an aggregate nominal amount of £19,000, and shall expire at the conclusion of the Company’s next Annual General Meeting following the date of the passing of the resolution, save that the Company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of any such offer or agreement as if the power had not expired. This power applies in relation to a sale of treasury shares as if all references in this resolution to an allotment included any such sale and in the first paragraph of the resolution the words ‘pursuant to the authority conferred by resolution 9’ were omitted in relation to such sale. In this resolution, ‘rights issue’ means an offer of equity securities open for acceptance for a period fixed by the Directors to holders of Ordinary Shares in the capital of the Company on the register on a record date fixed by the Directors in proportion as nearly as may be to the respective numbers of Ordinary Shares held by them, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with any treasury shares, fractional entitlements or legal or practical issues arising under the laws of, or the requirement of any recognised regulatory body or any stock exchange in any territory or any other matter. 11. THAT, subject to and in accordance with Article 9 of the Company’s articles of association, the Company be generally and unconditionally authorised to make market purchases (within the meaning of section 693(4) of the Act) of Ordinary Shares on such terms as the Directors think fit and where such shares are held as treasury shares, the Company may use them for the purposes set out in Section 727 of the Act, including for the purpose of its employee share schemes, provided that: (a) the maximum number of Ordinary Shares hereby authorised to be purchased is 3,800,000 being an amount equal to 10% of the Ordinary Shares in issue at the date of this Notice; (b) the minimum price, exclusive of any expenses, which may be paid for an Ordinary Share is 1 pence; (c) the maximum price, exclusive of any expenses, which may be paid for each Ordinary Share is an amount equal to the higher of: (i) 105 per cent of the average of the middle market quotations for an Ordinary Share as derived from the London Stock Exchange Daily Official List, for the five business days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and (ii) the amount stipulated by Article 5(1) of the Buy-back and Stabilisation Regulation 2003; and (d) the authority hereby conferred shall, unless previously revoked or varied, expire at the conclusion of the Company’s next Annual General Meeting following the date of the passing of the resolution, or, if earlier, on the expiry of 18 months from the date of the passing of the resolution, (except in relation to the purchase of Ordinary Shares, the contract for which was concluded before the expiry of the authority and which will or may be executed wholly or partly after that expiry). By order of the Board John Stansfield Company Secretary Dated: 4 June 2010 Registered office; Westwood, Margate, Kent CT9 4JX Registered in England and Wales with number 01547390 70 HORNBY PLC Annual Report & Accounts 2010 NOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. This notice is being sent to all members and to any person nominated by a member of the Company under section 146 of the Companies Act 2006 to enjoy information rights. Only holders of Ordinary Shares, or their duly appointed representatives, are entitled to attend, vote and speak at the AGM. A member so entitled may appoint (a) proxy/(ies), who need not be (a) member(s), to attend, speak and vote on his/her behalf. A member may appoint more than one proxy, provided that each proxy is appointed to exercise the rights attached to different shares. A Proxy Form is enclosed with this Notice. Proxies may only be appointed by completing and returning the form of proxy enclosed with this Notice to the Company’s Registrars, Capita Registrars Limited PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU. To be valid a proxy appointment must reach the office of the Company’s Registrars not less than 48 hours before the time fixed for the AGM or any adjournment thereof. Therefore, the form of proxy must be received by the Company’s Registrars by 11am on 27 July 2010. Return of the form of proxy will not preclude a member from attending the meeting and voting in person. You may not use any electronic address provided in the Notice of this meeting to communicate with the Company for any purposes other than those expressly stated. The right to appoint a proxy does not apply to persons whose shares are held on their behalf by another person and who have been nominated to receive communications from the Company in accordance with section 146 of the Companies Act 2006 (‘nominated persons’). Nominated persons may have a right under an agreement with the registered shareholder who hold shares on their behalf to be appointed (or to have someone else appointed) as a proxy. Alternatively, if nominated persons do not have such a right, or do not wish to exercise it, they may have a right under such an agreement to give instructions to the person holding the shares as to the exercise of voting rights. The Company, pursuant to Regulation 41 of the Uncertified Securities Regulations 2001, specifies that only those Shareholders on the register of members of the Company as at 11am on 27 July 2010 (or, if the AGM is adjourned, Shareholders on the register of members not later than 48 hours before the time fixed for the adjourned meeting) are entitled to attend and vote at the AGM in respect of the shares registered in their names at that time. Subsequent changes to the register shall be disregarded in determining the rights of any person to attend and vote at the AGM. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. Copies of contracts of service and letters of appointment between the Directors and the Company will be available for inspection at the registered offices of the Company and the offices of Berwin Leighton Paisner LLP at Adelaide House, London Bridge, EC4R 9HA during normal business hours from the date of this Notice, until the conclusion of the AGM, and at the place of the AGM for at least 15 minutes prior to the AGM until its conclusion. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that (i) if a corporate member has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corporate representatives for that member at the meeting, then on a poll those corporate representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (ii) if more than one corporate representative for the same corporate member attends the meeting but the corporate member has not appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. Corporate members are referred to the guidance issued by the Institute of Chartered Secretaries and Administrators on proxies and corporate representatives - http://www.icsa.org.uk/ - for further details of this procedure. The guidance includes a sample form of representation letter if the Chairman is being appointed as described in (i) above. Under section 527 Companies Act 2006 members meeting the threshold requirements set out in that section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the AGM; or (ii) any circumstances connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 Companies Act 2006. The Company may not require the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 Companies Act 2006. Where the Company is required to place a statement on a website under section 527 Companies Act 2006, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the AGM includes any statement that the Company has been required under section 527 Companies Act 2006 to publish on a website. 12. A copy of this Notice, and other information regarding the meeting, as required by section 311A Companies Act 2006, is available from www.hornby.com 13. Any member attending the meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. 14. As at 3 June 2010 (being the latest practicable date prior to the publication of this Notice), the Company’s issued share capital consists of 38,064,100 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 4 June 2010 are 38,064,100. HORNBY PLC Annual Report & Accounts 2010 71 Five Year Summary Turnover Profit on ordinary activities before taxation Taxation 2010 £’000 2009 £’000 2008 £’000 2007 £’000 2006 £’000 64,736 61,569 55,692 46,849 44,113 5,215 (1,530) 6,121 (1,909) 9,017 (2,940) 7,662 (2,149) 8,164 (2,306) Profit on ordinary activities after taxation 3,685 4,212 6,077 5,513 5,858 Assets employed: Non-current assets Net current assets Non-current borrowings Deferred tax liabilities Net assets Total capital employed Earnings per share – basic – diluted Dividend per share (net) Net assets per share 28,803 18,653 (10,547) (281) 29,903 9,133 (7,181) (301) 20,812 11,037 (41) (346) 19,406 8,850 (53) (358) 15,632 9,501 (39) (231) 36,628 31,554 31,462 27,845 24,863 36,628 31,554 31,462 27,845 24,863 9.8p 9.6p 5.0p 96.2p 11.2p 11.0p 2.7p 83.1p 16.2p 15.6p 8.5p 82.8p 14.6p 14.1p 8.1p 73.6p 15.6p 15.1p 7.7p 66.2p 72 HORNBY PLC Annual Report & Accounts 2010 Contents Financial Highlights Chairman’s Statement Chief Executive’s Report Directors and Corporate Information Directors’ Report Corporate Governance Statement 1 2 4 8 9 13 19 Directors’ Remuneration Report 25 26 Statement of Directors’ Responsibilities Independent Auditors’ Report to the Members of Hornby Plc Group and Company Statement of Comprehensive Income 28 29 Group and Company Balance Sheet Statement of Changes in Equity 30 31 Group and Company Cash Flow Statement 32 Notes to the Cash Flow Statement 33 Notes to the Financial Statements 69 Notice of Annual General Meeting 72 Five Year Summary SHAREHOLDERS’ INFORMATION SERVICE HORNBY WELCOMES CONTACT WITH ITS SHAREHOLDERS. IF YOU HAVE QUESTIONS OR ENQUIRIES ABOUT THE GROUP OR ITS PRODUCTS, PLEASE CONTACT: A J MORRIS, FINANCE DIRECTOR HORNBY PLC WESTWOOD MARGATE KENT CT9 4JX Annual Report & Accounts FOR THE YEAR ENDED 31 MARCH 2010 H O R N B Y P L C A n n u a l R e p o r t & A c c o u n t s 2 0 1 0 Hornby PLC Westwood, Margate, Kent CT9 4JX www.hornby.com 

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