H H o o r r n n b b y y P P L L C C A A n n n n u u a a l l R R e e p p o o r r t t a a n n d d A A c c c c o o u u n n t s t s 2 2 0 0 1 1 6 6 Hornby PLC 3rd Floor The Gateway Innovation Way Discovery Park Sandwich Kent CT13 9FF www.hornby.com ANNUAL REPORT AND ACCOUNTS 2016 Hornby Plc The Group’s principal business is the development, production and supply of hobby and toy products for a global market. The Group distributes its products through a network of specialists and through its online activities and multiple retailers throughout the UK and overseas. Strategic report 01 Highlights 2016 02 Chairman’s Statement 04 Chief Executive’s Report 04 Business Model and Strategy 08 Operating and Financial Review of the Year 11 Our Key Performance Indicators Governance 13 Directors and Corporate Information 14 Directors’ Report 18 Independent Auditors’ Report to the Members of Hornby Plc Financial statements 20 Group and Company Statements of Comprehensive Income 21 Group and Company Balance Sheets 22 Group and Company Statements of Changes in Equity 23 Group and Company Cash Flow Statement 24 Notes to the Financial Statements 58 Shareholders’ Information Service Highlights 2016 “Last year was difficult and disappointing, as we faced significant challenges during the continued turnaround and improvement of the business. We were pleased with the progress made in modernising many of our systems and processes but much of the change last year resulted in substantial unplanned disruption which had a significant adverse impact on trading performance. “The Board has now completed a thorough review, which has identified that many core parts of the Group are stable, profitable and cash generative, driven by iconic brands with strong market positions. The review has also identified areas that require fundamental change. The turnaround plan is intended to return the business to sustainable profitability and cash generation.” Steve Cooke, Chief Executive Revenue (2015: £58.1m) Operating loss (2015: £0.3m profit) £55.8m £(13.1)m Underlying1 operating loss (2015: £2.1m profit) £(5.3)m Reported loss before taxation (2015: £(0.2)m loss) Underlying1 loss before taxation (2015: £1.6m profit) Reported loss after taxation (2015: £(0.1)m loss) £(13.5)m £(5.7)m £(13.7)m Reported loss per share (2015: (0.31)p loss) Underlying basic loss per share (2015: 3.38p basic earnings) Total dividend per share (2015: nil) (27.87)p (13.02)p nil 1 Underlying figures are before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and exceptional items. 01 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Chairman’s Statement Personal perspectives The last twelve months have been extremely challenging but I am pleased with the progress made with modernising the business. I believe we have in place the right leadership and a pool of talented people to deliver the plan to return the business to sustainable profit and cash generation. Last year resulted in some strongly contrasting emotions. On the one hand trading was very disappointing with the implementation of the new enterprise resource planning (‘ERP’) system and reorganisation of our European businesses disrupting our delivery and our ability to service our customers. However, on the other hand, although it is important to focus on the financial underperformance, we achieved much last year and I am pleased with the progress we have made in improving and modernising the business. I believe we have ended the year in a stronger place following the comprehensive review of the business and commitment to a new clear plan to continue the turnaround of the business. In the UK, as previously announced, sales during the summer of 2015 were disrupted by the implementation of the new ERP system. Trading was then strong during the key Christmas season but weakened dramatically into the new year. Despite the problems, overall external sales increased by 3% year-on-year and this was key to ensuring that we continued to serve our core hobby consumers who underpin the strength of our brands in the UK. In addition, we have addressed the supply chain issues that have historically held back the business with sustained investment in people and strengthening of procurement processes in Hong Kong, where many of our products are manufactured. This leaves the business in an improved position with a leaner operating structure, an ERP system which is helping us to drive improved control, and a supply chain from factory to consumer that has real capability to be scaled as necessary. In Europe, trading was severely impacted by problems with the supply of international model rail for much of the first half of the financial year. The European operating model was streamlined during the year with supply and logistics now being provided through the UK infrastructure at 02 Hornby Plc Annual Report and Accounts 2016 • Revenue of £55.8 million (2015: £58.1 million) • Underlying loss before tax1 of £5.7 million (2015: £1.6 million profit) • Net debt at 31 March 2016: £7.2 million (2015: £7.5 million) • Exceptional items of £7.9 million (2015: £0.8 million) including costs relating to the implementation of the ERP system, restructuring of the business, refinancing, impairment of tooling and goodwill and a profit on the sale of part of the Margate site • Reported loss after tax £13.7 million (2015: £0.1 million loss) 1 Stated before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and exceptional items. Hersden by a third party provider. The new business plan will focus sales on our strong and profitable brands and as a result I expect the international business will emerge much stronger and will begin to show sustained trading improvement. Given the challenges we have faced and the resulting disappointing financial performance this year, we have undertaken and completed a comprehensive review of the business, led by Steve Cooke. This has led to the development of a clear plan to turn around the business, to move it back to a position of sustainable profit and cash generation and to identify the necessary investment required. This will result in a smaller, more focused business, concentrated on our major UK brands and a streamlined European operating model which will be run out of the UK. The plan will be implemented during the course of 2016 and I expect to see the impact of the plan from early 2017. To underpin this plan and to enable the Group to move forward with the appropriate financing structure in place, we have approached investors to raise additional equity funding of £8 million and have also signed a new three-and- a-half year, £10 million facility with the Group’s bankers, which is subject to the completion of the equity raise. I am delighted that we are able to announce today the successful conclusion of these discussions with investors and that the proposed equity raise will be put to our shareholders on 8 July 2016. I am highly confident that our shareholders will approve the placing but would draw to your attention the fact that if they are not approved there are serious concerns over the Group’s ability to continue as a going concern. The fact that the placing is yet to be approved by shareholders represents a material uncertainty and more detail can be found in the Going Concern paragraphs in the other statements below. Board changes On 15 February 2016, we announced that Richard Ames would be stepping down as Chief Executive and leaving the business. I took up the role of Executive Chairman with immediate effect ahead of a permanent appointment. Further to the announcement on 26 April 2016, I have agreed with the Board to remain Executive Chairman at least until the end of the transition period of the new business plan. On 26 April 2016, we announced that Group Finance Director, Steve Cooke, was appointed Chief Executive. Steve joined the business in June 2015 and has been making a significant contribution as we continue to make progress with our strategy to drive the Group’s turnaround. On 26 May 2016, the Company announced that David Mulligan had been appointed Interim Group Finance Director. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc and has a successful track record of working with companies undergoing change. Following completion of the transaction, the Board intends to immediately begin the process of identifying an additional Non-Executive Director, to further strengthen the Board and to ensure that it remains suitable for the Company’s purposes. Shareholder engagement We will hold our Annual General Meeting (‘AGM’) this summer and this will be an excellent opportunity for shareholders to hear more about the new business plan. Personally I am looking forward to welcoming as many shareholders as possible that are able to attend. I am confident that under Steve’s leadership, the Group has the people and plan to build on the foundations for recovery that we have put in place over the last two years and to return the business to sustainable profit and cash generation. Once we have completed the changes demanded by the new plan this year, the business will be in a position to grow and succeed in the medium term. Roger Canham Executive Chairman 22 June 2016 03 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Chief Executive’s Report The recent strategic review identified core parts of the business that are stable and profitable driven by iconic brands. Strategic review The recent strategic review identified core parts of the business that are stable and profitable driven by iconic brands. However, fundamental change is required in other areas to deliver sustainable profit and cash generation. Hornby now has in place a clear plan focused on a smaller number of product lines and streamlined operations which will deliver this change. Pages 4 to 11 set out the strategic report for the business. Business model and strategy The Group’s principal business is the design, development, production and supply of hobby and toy products. The Group distributes its products through a network of specialists through its online activities and multiple retailers throughout the UK and overseas. Review and turnaround pan Last year was difficult and disappointing for Hornby as the business faced into significant challenges during the continued turnaround and improvement of the business. We were pleased with the progress made in modernising product sourcing, improving management of the supply chain, upgrading the logistics, warehousing, stock control processes and accelerating the distribution routes to customers. We also successfully rolled out a new enterprise resource planning (‘ERP’) system although there were some major early implementation issues. However, these changes, together with a difficult restructuring of the European businesses resulted in substantial unplanned disruption which had a significant adverse impact on trading performance. The resulting underlying loss for the year of £5.7 million, though in line with the Board’s revised expectations, was 04 Hornby Plc Annual Report and Accounts 2016 Maintain key UK brands All key UK brands will be retained. The Group owns a number of highly recognisable and profitable brands (Hornby, Scalextric, Airfix, Humbrol and Corgi), which are core to the Group’s future strategy. The Group sells products into both the hobby market and toy market. The new business plan will be strongly focused on improving service to core hobby customers, especially through the independent sales channel. Streamline European operating model and brands The Group intends to refocus its European business on its most profitable European model rail brands. This will allow the business to maintain a strong market position in international model rail. In addition, operations and product development will be centralised in the UK, resulting in a significant reduction in the cost base of the European business. The Group intends to retain its US business given its historic profitability and future growth potential. extremely disappointing. All of our recent attention has been focused on analysing the cause of this underperformance and on creating a new plan for the business to turn around its fortunes. Thorough review and new business plan The Board has now completed a thorough review of the business’ operations, including its brands, product lines, distribution channels and territories. The review has identified that many core parts of the business are stable, profitable and cash generative, driven by iconic brands with strong market positions. The review has also identified areas of the business that require fundamental change to deliver sustainable profit and cash generation. The Board intends to refocus the business on existing profitable and cash generative products, channels and geographies. This is expected to result in a contraction of revenue as the number of products, brands and channels are reduced. The Board intends to reduce the cost base of the business to reflect projected revenue and a simplified overall business model. The recent implementation of the ERP system is now complete and is expected to facilitate operational improvements through access to better quality management information. The new business plan is intended to return the business to sustainable profitability and cash generation through the following key steps: Reduce business scale and costs The Group intends to focus on the most profitable and cash generative areas of the business and to make significant cost savings. As a result, it expects to reduce revenue by approximately a quarter. 05 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Chief Executive’s Report continued Implementation of the new business plan is expected to give rise to restructuring costs in the current financial year of approximately £1.7 million across the Group’s UK and European operations. Implementation of any changes to the business and product lines will be phased and structured to minimise disruption to the core business. In the short term, after a period of transition in 2016, the Board expects the new business plan to result in a modest improvement in gross margin in 2017–18 (driven only by the improved mix effect of the product range rationalisation), with variable costs to reduce significantly. Once implemented, the new business plan for 2017–18 is estimated to result in an approximately 33% reduction in fixed costs. Focusing on a reduced number of product lines is expected to reduce the Company’s capital expenditure, with a consequent significant positive impact on its cash generation (EBITDA less capital expenditure). In the medium term, the new business plan targets modest revenue growth, a stabilisation of gross margin and EBITDA improvement driven by operational gearing. Combined with a stable level of capital expenditure this is expected to result in improved cash generation. Our brands The start of the year saw James May proclaim the Corgi ‘Goldfinger DB5’ his ‘car of the century’ and we celebrated this accolade by re-releasing the model for a new generation of customers. To complement this a dedicated ‘SPECTRE’ DB10 and a DB5/DB10 twin-pack was issued alongside the Scalextric ‘SPECTRE’ set, incorporating replicas of the iconic Aston Martin DB10 and Jaguar C-X75, linked to the launch of the latest James Bond film, which capitalised on the interest surrounding the new James Bond film. Another highlight of the year was the significant public interest and press coverage of the Flying Scotsman’s inaugural journey from King’s Cross to York in February, which helped drive sales of Hornby’s ‘The Flying Scotsman’ set. Notable Airfix releases during the year included the 1:72 scale Westland Sea King Helicopter and the Quickbuild Focused product range Over recent years the product range of the business has expanded significantly. The Board now intends to reduce the number of individual product lines by approximately 40%. during the 2016 calendar year, focusing on products which generate higher gross margins. This will reduce business complexity and activity levels which will then allow the cost base to be reduced. In the financial year ended 31 March 2016, approximately 50% of the business’ product lines contributed approximately 90% of the gross margin. Even after the planned reduction, the Group will be actively managing approximately 1,400 product lines in the 2017–18 financial year. The product range will be streamlined further in 2017, while continuing to release innovative new products to the market. Refine channel strategy and exit concessions In the UK the Group intends to exit a majority of its concession arrangements as it looks to focus on profitable channels to market and improve its customer service. The Board has been pleased with the growing profitability of its independent and internet distribution channels and in particular intends to support and build on the success of the independent channel. The Company’s online sales increased by 39% compound annual growth rate between 2013 and 2015 and the Company is keen to improve upon this. Careful management of stock The failure to meet sales expectations in the 2015–16 financial year combined with the forthcoming rationalisation of the product range, exit of the concessions channel and contraction of the European business has resulted in a higher than necessary level of stock. The plan is to reduce this in a staged and managed way during the coming year, which will result in cash generation and stock returning to more normal levels. 06 Hornby Plc Annual Report and Accounts 2016 For the ten weeks to 12 June 2016 the Group delivered total year-on-year sales growth of 6%. This has been driven largely by the UK, underpinned by the stock reduction programme and the US. The European businesses are trading broadly in line with last year. This level of performance is in line with our expectations and the new business plan. Group net debt as at 12 June 2016 was approximately £8.1 million. At this early stage, the Board considers the transition to the new plan is progressing well. As a result, the Board is confident that the new business plan can be delivered successfully and that Hornby can return to being a profitable and cash generative business which will progress to delivering shareholder value in the medium term. Steve Cooke Chief Executive 22 June 2016 range (aimed at children and requiring no paint or glue), which added three new Hypercars (the Bugatti Veyron, Lamborghini Aventador and McLaren P1) to its lineup. In Europe, the year also saw strong sales of new lines across the Arnold, Jouef and Rivarossi brands. Our people The quality of our products and strength of our brands is due to the passion and commitment of Hornby’s talented people. We have continued to attract talented people to the business and have a strong team in place. However, the changes demanded by the new business plan include significant cost reductions and these will inevitably impact people. We will deal with these challenges in a professional and sensitive manner and I am confident that we will be able to build a stronger and profitable Company which will then be in a position to continue to provide high quality products and service to its customers. Outlook for 2016–17 and current trading The outlook for the medium term is underpinned by the new equity and debt proposals that are announced today, which we trust will be approved by our shareholders on 8 July 2016. Without the successful conclusion of these funding plans, the new business plan will not be deliverable. The remainder of the 2016–17 financial year will be a period of transition for the Company as we reshape and streamline the business to deliver the plans outlined above. The year will include the various impacts of refocusing the business including an initial period running with a cost base which is too high, the costs of restructuring and the financial impact of stock reduction, which is expected to result in cash generation and a reduction of stock to normal levels. 07 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Operating and Financial Review of the Year Performance Full year gross profit margin was lower, as expected, at 39% (2015: 47%) as a result of the planned clearance of old stock especially within the European subsidiaries and due to a change in the mix towards lower margin racing sets. In addition, there was also a lack of new, high margin European train stock because of the supply chain problems during the year. Underlying overheads increased year- on-year by 8% in line with an expected increase in volumes and also due to the increase in distribution costs following the disruption to trading during the year and planned duplication of operational running costs. The new warehouse at Hersden was fully operational during the first half of the year but the various international warehouse operations were also still running during the year. Foreign exchange gains on trading transactions in the year totalled £0.8 million compared to losses of £0.2 million in the previous year. Sales and marketing costs increased by £0.3 million due to increased spend on TV advertising and market research. Pre-tax loss before net foreign exchange movements on intercompany loans, amortisation of intangible brands, restructuring costs, implementation of the new enterprise resource planning (‘ERP’) system, refinancing costs, profit on disposal of property, impairment of tooling and impairment of goodwill (hereafter referred to as underlying (loss)/profit before taxation) was £(5.7) million (2015: profit of £1.6 million) (see reconciliation in note 1). Basic (loss)/earnings per share calculated on underlying (loss)/ profit before taxation (hereafter referred to as underlying basic (loss)/earnings per share) were (13.02)p (2015: 3.38p). A total of £7.9 million (2015: £1.8 million) of costs in these accounts have been identified as outside our definition of the measure of underlying profit as can be seen Consolidated revenue for the year ended 31 March 2016 was £55.8 million, a decrease of 4% compared to the previous year’s £58.1 million. 08 Hornby Plc Annual Report and Accounts 2016 in note 1. These costs in the year included the net foreign exchange impact on intercompany loans (gain of £0.4 million), amortisation of intangibles (£0.4 million) and exceptional items totalling £7.9 million. Of this total £5.1 million (2015: £1.0 million) was the amortisation of intangible assets, the revaluation of intercompany loans, impairment of goodwill and impairment of tooling all of which are non-cash costs. to restructure the European businesses, impairment of tooling (£1.1 million) following the decision to discontinue certain product lines as part of the new business plan outlined in the CEO report, costs relating to the implementation of the new ERP system (£1.2 million), costs relating to the 2015 equity issue and bank refinancing (£0.8 million) less the profit on the sale of part of the Margate site (£0.2 million). The exceptional items totalling £7.9 million (2015: £0.8 million) include restructuring costs (£1.0 million) relating to the reorganisation of the European management teams and the costs of running the Margate site, impairment of goodwill (£4.0 million) following the decision Reported pre-tax loss was £13.5 million (2015: loss of £0.2 million) and reported basic loss per share was (27.87p) (2015: 0.31p loss per share). The income tax charge for the year £0.2 million (2015: £0.1 million credit) arises mainly due to prior year adjustments to deferred tax. Segmental analysis Third party sales by the UK business grew by 3% in the year and generated an underlying loss of £2.1 million compared to £1.6 million profit last year. Sales during the summer of 2015 were disrupted by the implementation of the new ERP system. Trading was then strong during the key Christmas season but weakened dramatically into the new year. The international businesses sales fell by 21% in the year and generated an underlying loss of £3.6 million. Trading was severely impacted by problems with the supply of international model rail for much of the first half of the financial year and by the streamlining of supply and logistics. Balance sheet Group inventories increased during the year by 9% from £12.5 million to £13.6 million due to the overhang of stock from the overall sales shortfall against expectations during the year. Trade and other receivables increased by 26% due to some large sales orders being fulfilled just before year end, with a fall post the year end to £9.8 million at the end of April (2015: £8.2 million). Trade and other payables reduced by £1.7 million largely due to a year-on-year reduction of stock purchases in the first calendar quarter of 2016. The net effect of these factors was an increase in working capital requirements by £5.6 million (an increase of 41%). Investment in new tooling, new computer software and other capital expenditure was £4.6 million (2015: £5.1 million). Capital structure On 12 August 2015, Hornby’s ordinary shares of 1 pence each were admitted to trading on the Alternative Investment Market (‘AIM’). The ordinary shares were removed from trading on the Main Market of London Stock Exchange plc and their listing on the Official List was cancelled. The placing, which was announced on 18 June 2015, raised net funds of £14.2 million. 09 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Operating and Financial Review of the Year continued Financial Review Revenue Gross profit margin Underlying (loss)/profit before tax1 Underlying (loss)/profit before tax margin1 Loss before tax Reported loss before tax margin Reported loss after tax Underlying basic (loss)/earnings per share1 Basic loss per share Net debt 2016 2015 £55.8m 39% £(5.7m) (10.2%) £(13.5m) (24.3%) £(13.7m) (13.02)p (27.87)p £7.2m £58.1m 47% £1.6m 2.8% £(0.2m) (0.3%) £(0.1m) 3.38p (0.31)p £7.5m 1 Stated before amortisation of intangibles (brands and customer lists), net unrealised foreign exchange movements on intercompany loans, and exceptional items. Borrowings in the year ended 31 March 2016 peaked towards the start of the year under the previous bank facility at £12.9 million. Since August 2015 the Company has operated within its new facility limit of £10 million. Property update During the year part of the former head office and warehouse site was sold for a consideration of £0.4 million. We are currently in discussions with a potential purchaser regarding the sale of the remainder of the Margate site. The Hornby Visitor Centre remains located on the main part of the site and will require relocation. In addition, post the year-end, we completed the sale of office premises in Spain for a consideration of €1.3 million. Going concern The Group’s turnaround plan requires additional investment, so the Group are proposing to raise £8 million of additional equity to enable management to pursue this plan. The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group’s bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016. The Group has prepared cash flow forecasts on the basis of the additional equity raise and new facility and after a detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements. However, as the current fundraise has not yet been approved by shareholders prior to approval of these financial statements there remains a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. The funds raised in 2015 have been utilised by the investment in new product tooling, the development of the new ERP system and disappointingly by the cash losses sustained during the year and by the increased working capital requirement. There was a decrease in net debt at 31 March 2016 to £7.2 million, from £7.5 million at 31 March 2015. Dividend The challenges facing the business during the past twelve months have been significant and consequently trading has been impacted. Therefore, the decision has again been taken not to pay a dividend (2015: 0.0p). The Board continues to keep the dividend policy under review. Banking facilities At 31 March 2016 the Group had in place a revolving credit facility of £10 million expiring August 2019. The Group has today announced a proposed placing and open offer of £8 million. Subject to completion of the proposed equity fundraising, the Company has agreed with its main lender, Barclays Bank Plc, to refinance and extend its existing banking facilities with a £10 million revolving credit facility. The new facility will mature on 31 December 2019 and is expected to allow sufficient headroom for trading working capital and capital expenditure needs through to such date. The new facility has a margin of 3.5% over LIBOR and is subject to commitment and utilisation fees dependent on the level of drawings under the facility. As is customary the facility is subject to financial covenants, which the Group must comply with and which are to be tested quarterly. For the duration of the transition period of the Group’s new business plan through to December 2017, such financial covenants shall comprise a minimum EBITDA test and a current asset (stock and receivables) to net debt test. Thereafter, the financial covenants shall revert to customary leverage and interest cover financial covenants. 10 Hornby Plc Annual Report and Accounts 2016 Our Key Performance Indicators (‘KPIs’) The Directors are of the opinion that the financial KPIs are revenues, gross margins, underlying (loss)/profit before tax, (loss)/ earnings per share and cash generation, the information for which is available in these financial statements and summarised on the financial highlights section earlier in this report. In light of the work currently being undertaken on the new business plan, management will put in place additional KPIs to monitor progress on the key elements of the plan, which are considered fundamental to performance during the transition period. The Board monitors progress against plan on a regular basis adjusting future objectives annually in line with current circumstances. Identification of principal risks and uncertainties The Board has the primary responsibility for identifying the major risks facing the Group and developing appropriate policies to manage those risks. The Board completes an annual risk assessment programme in order to identify the major risks and has reviewed and determined any mitigating actions required as set out below. The risk assessment has been completed in the context of the overall strategic objectives and the new business plan of the Group which has been set out on pages 4 to 7. Principal risks and uncertainties Risk Description Impact/Sensitivity Mitigation/Comment 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, overall consumer and retailer confidence, and the changing retail landscape. The Group performance is impacted by the global macro-economic environment and changes in the wider retail landscape. New business plan New business plan may not fully achieve the aims outlined in the CEO report. Distribution channels The retail landscape is changing with the Group’s traditional high street independent distribution network under significant commercial pressure from online retailers and discounters. The reduction in business scale and costs, the reduction of the product lines, the requisite level of stock reduction, headcount reductions and/ or the conversion of concession sales currently anticipated is not achieved and the Group does not achieve sustainable profit and cash generation. High street failures will reduce traditional customer base sales levels and increase credit risk. Competing brands The Group has competition in the model railway, slot racing, model kits, die cast and paint markets. Loss of market share to increased competitor activity would have a negative impact on the Group’s results. Exchange rates The Group purchases goods in US Dollars and sells in Pounds Sterling, Euros and US Dollars and is therefore exposed to exchange rate fluctuations. Significant fluctuations in exchange rates to which the Group is exposed could have a material adverse effect on the Group’s future results. In reviewing the future forecasts for the business the Directors consider reasonable changes in macro-economic and associated market conditions recognising the potential for a negative impact on the Group’s results and ensure that resources are flexed to maximise the Group’s objectives as a result. The Group has developed clear targets and has contingencies in the plan to put the necessary resources in place to deliver the aims of the plan. The Group formulates its business strategy, including the website and direct to consumer channels, based on the changing retail dynamics. The Group will continue to strike a balance between selling direct through its website and through its independent and national customers, which remain important to its core markets. In many of our markets the Group enjoys a strong market position due to the continued development of our brands. Brands are extremely important in the model sector with market entry costs being prohibitive. The Group continues to hedge short-term exposures 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. 11 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Our Key Performance Indicators (‘KPIs’) continued Risk Description Impact/Sensitivity Mitigation/Comment Supply chain The Group purchases goods, in the main, from third party Chinese suppliers due to the significant cost advantage when compared to products manufactured in Europe. Capital allocation The Group now holds over 5,000 product lines across its own brand range. Product compliance The Group’s products are subject to compliance with toy safety legislation around the world. Liquidity Insufficient financing to meet the needs of the business. The Group does not have exclusive arrangements with its suppliers and there is a risk that competition for manufacturing capacity could lead to delays in introducing new products or servicing existing demand. Input cost escalation in China could reduce or remove the Group’s pricing advantage and impact margins. Producing smaller quantities of more products puts pressure on gross margins and can lead to increased stock levels. Failure to comply could lead to a product recall resulting in damage to Company and brand reputation along with an adverse impact on the Group’s results. Without the appropriate level of financing it would be increasingly difficult to execute the Group’s business plans. System and cyber risk The Group continues to invest in its e-commerce with the expansion and development of its website and has implemented a new ERP system during the year. This exposes the business to greater risk of financial loss, disruption or damage to the reputation of an organisation from a failure of its information technology systems. The Group is continuing to develop and diversify its supplier portfolio, which includes a supplier in India and more recently in the UK. Investment in product sourcing capability in Hong Kong in the last few years has led to an increase in the number of suppliers available to the Group in China. A 26 step critical path analysis tool has been developed to monitor the whole manufacturing process in order to identify and deal with issues as they arise. The Group has its own facilities in China where its tooling is secured and managed. The new business plan will significantly reduce the number of product lines and refocus the business on profitable lines which generate higher gross margins. This process will be underpinned by a robust capital allocation process. Robust internal processes and procedures, active monitoring of proposed legislation and involvement in policy debate and lobbying of the relevant authorities. The Group had a revolving credit facility of £10 million expiring December 2019. The Group’s policy on liquidity risk is to maintain adequate facilities to meet the future needs of the business. This has recently been renegotiated on the back of the proposed equity raise and the Group now has a £10 million facility expiring in December 2019, conditional on the equity proposals being approved by shareholders. The Group has invested significant time and cost in the new website and ERP system in the last two years. The Group has dedicated web and ERP teams to monitor and maintain the Group’s systems and holds appropriate insurance policies to minimise material risk. 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, and are designed to meet the Group’s requirements and both financial and operational 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. Ordinarily, 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. Given the recent challenges the Group has faced, the budget for the current financial year has recently been finalised to reflect the targets in the new business plan. David Mulligan Group Finance Director 22 June 2016 12 Hornby Plc Annual Report and Accounts 2016 Directors and Corporate Information Directors S Cooke Chief Executive R Canham Executive Chairman D Mulligan Group Finance Director D Adams Non-Executive Director C Caminada Non-Executive Director Company Secretary A Stacey Registered office 3rd Floor The Gateway Innovation Way Discovery Park Sandwich Kent CT13 9FF Company Registered Number Registered in England Number: 01547390 Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors The Portland Building 25 High Street Crawley West Sussex RH10 1BG 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 Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 13 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby PLC Annual Report and Accounts 2016 Directors’ Report The Directors present their Annual Report together with the audited consolidated and Company financial statements for the year ended 31 March 2016. The Group’s business review along with future developments and the principal risks and uncertainties facing the Group are included in the Strategic Review. However, as the current fundraise has not yet been approved by shareholders there remains a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. RESEARCH AND DEVELOPMENT The Board considers that research and development into products continues to play an important role in the Group’s success. All R&D costs incurred in the year have been charged to the Statement of Comprehensive Income and are set out in note 4, these costs all relate to research costs. DIRECTORS The persons who were Directors during the year and up to the date of signing the financial statements are listed below: Steve Cooke, aged 50, joined the Board on 13 July 2015 as Finance Director and on 26 April 2016 was appointed Chief Executive. Steve has significant financial and general management experience in both PLC and private environments. Previously, he was Finance Director at LSL Property Services PLC, COO at Bestinvest, CFO at Mapeley and CFO at Energis, where he was part of the successful turnaround team. Having qualified with Coopers & Lybrand, Steve was a strategy consultant with OC&C before spending time in senior financial and general management roles at Sainsbury’s, Homebase and B&Q. David Mulligan, aged 46, was appointed to the Board on 25 May 2016. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc. Most recently he was Municipal FD at Shanks Group plc. Prior to this he worked at Smiths Group plc and trained as a chartered accountant at Ernst & Young. Roger Canham, aged 50, was appointed to the Board on 7 November 2012 and became Chairman on 1 February 2013. Roger has been Chairman of Phoenix Asset Management Partners Limited (‘Phoenix’) since 2009 and also owns and manages a number of property development companies. Prior to that, he was a Non-Executive Director of Goshawk Insurance Holdings PLC from 2007 until the business was acquired in 2008, and a Director of Brake Bros Limited, for a year following its acquisition of W. Pauley & Co Limited in 2002. Roger joined W. Pauley & Co Limited in 1990 and became Managing Director in 1996. David Adams, aged 61, was appointed a Non-Executive Director on 9 January 2014. David is currently senior Non-Executive Director of Halfords plc and chairs Conviviality Retail plc, Ecovision Ltd, Park Cameras Ltd, and Walk the Walk (a breast cancer charity). In addition, he is a Non-Executive Director of Fever-Tree Drinks plc. David chairs the audit committee at Halfords and Fever-Tree Drinks. Prior to that he was Executive Chairman of Jessops and Chief Financial officer and Deputy Chief Executive officer at House of Fraser plc. 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 with a branch in Hong Kong, Hornby America Inc. in the US, 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 which is listed on the Alternative Investment Market (‘AIM’), and incorporated and operating in the United Kingdom. Its registered office is set out on page 13. The Group is principally engaged in the development, design, sourcing and distribution of hobby and interactive products. RESULTS AND DIVIDENDS The results for the year ended 31 March 2016 are set out in the Group and Company Statements of Comprehensive Income on page 20. Revenue for the year was £55.8 million compared to £58.1 million last year. The loss for the year attributable to equity holders amounted to £13.7 million (2015: £0.1 million loss). The position of the Group and Company is set out in the Group and Company Balance Sheets on page 21. Future developments are set out within the CEO report within the outlook paragraph on page 7. No interim dividend was declared in the year (2015: £nil) and the Directors do not recommend a final dividend (2015: £nil). Going concern The Group’s turnaround plan requires additional investment, so the Group are proposing to raise £8 million additional equity to enable management to pursue this plan. The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group’s bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016. The Group has prepared three-year cash flow forecasts on the basis of the additional equity raise and new facility and after detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements. 14 Hornby PLC Annual Report and Accounts 2016 Charlie Caminada, aged 57, was appointed a Non-Executive Director on 9 January 2014. Charlie was previously Chief Operating Officer of HIT Entertainment Plc, which is now part of Mattel. His most recent position was the Founder and Chief Operating Officer of Ludorum, a media investment company that focused on managing IP franchises for children’s entertainment brands, including Chuggington. Charlie led the Company’s IPO on AIM in 2006. He is a Non-Executive Director of Shoe Zone Plc and chairs the Remuneration Committee at the Company. • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. Richard Ames, aged 44, was appointed to the Board on 28 April 2014. Richard resigned on 12 February 2016. Nick Stone, aged 51, joined the Group on 14 January 2013 and was appointed Group Finance Director on 1 February 2013. Nick Stone left Hornby in October 2015 and was replaced by Steve Cooke who joined the business on 10 June 2015. The interests of the Directors in the shares of the Company and in options granted over such shares are disclosed later in this Report. DIRECTORS’ INDEMNITIES The Company maintained liability insurance for its Directors and officers during the financial year and up to the date of approval of the Annual Report and Accounts. 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. SUBSTANTIAL SHAREHOLDINGS The Company has been notified that at close of business on 17 June 2016 the following parties were interested in 3% or more of the Company’s ordinary share capital. Shareholder Phoenix Asset Management Partners Limited New Pistoia Income Limited Ruffer LLP Downing LLP Number of ordinary shares Percentage held 16,257,323 12,129,000 7,022,583 3,156,437 29.58 22.07 12.78 5.74 STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report and Accounts 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; 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 comply with the Companies Act 2006. 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. Disclosure of information to auditors In the case of each Director in office at the date the Directors’ report is approved, that: (a) so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and (b) he has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. FINANCIAL INSTRUMENTS The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources, and various items, such as trade receivables, trade payables, etc. that arise directly from its operations. The Group’s financial liabilities comprise borrowings, trade payables, other payables and finance leases. The main purpose of the Group’s borrowings is to raise finance for the Group’s operations. The Group also has financial assets comprising cash and trade and other receivables. 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. It is, and has been throughout the period under review, the Group’s policy that no speculative trading in financial instruments shall be undertaken. FINANCIAL RISK MANAGEMENT The financial risk is managed by the Group and more information on this can be found within the notes to the financial statements on page 31. 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. 15 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby PLC Annual Report and Accounts 2016 Directors’ Report continued 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. One of the Company’s incentive schemes includes share scheme options for Directors and senior management, further detail of which is covered later in this Report. SHARE CAPITAL The share capital of the Company comprises ordinary shares of 1p each. Each share carries the right to one vote at general meetings of the Company. The issued share capital of the Company, together with movements in the Company’s issued share capital is shown in note 21. INDEPENDENT AUDITORS A resolution to reappoint the auditors, PricewaterhouseCoopers LLP, will be proposed at the forthcoming Annual General Meeting (‘AGM’). ANNUAL GENERAL MEETING The AGM is to be scheduled for summer 2016. A notice of the AGM will be sent out to shareholders separately to this Annual Report and Accounts. The notice of the AGM is important and requires your immediate attention. If you are in any doubt as to what action to take in relation to the AGM, you should consult appropriate independent advisers. DIRECTORS’ REMUNERATION 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. The following table summarises the total salary and pension contributions received by Directors for 2015–16 and 2014–15 in line with the Companies Act 2006 requirement: Year ended 31 March 2016 Year ended 31 March 2015 S Cooke (Joined 10 June 2015) R Canham D Adams C Caminada R Ames (Joined 28 April 2014, resigned 12 February 2016) N Stone (Resigned 10 June 2015) Total Basic salary and fees £’000 Pension contributions £’000 Total salary and pension contributions £’000 Basic salary and fees £’000 Pension contributions £’000 Total salary and pension contributions £’000 170 100 40 40 3731 1482 871 32 – – – 53 21 106 202 100 40 40 426 169 977 – 150 40 40 287 190 707 – – – – 56 36 92 – 150 40 40 343 226 799 1 2 Included within the basic salary and fees is compensation for loss of office totalling £96,000. Included within the basic salary and fees is compensation for loss of office totalling £36,000. Performance Share Plan (‘PSP’) awards outstanding At 31 March 2016, outstanding awards to Directors under the PSP were as follows: Market price at award date At 1 April 2015 Awarded during year Lapsed during year Vested during year At 31 March 2016 105.0p 190,476 – – – 81.5p 122,699 – 71.0p 845,070 845,070 (845,070) – 292,857 (292,857) (72,883) – 253,521 (253,521) 81.5p 220,859 253,521 71.0p 105.0p – – – – – – 190,476 122,699 – – 147,976 – Award date Vesting date Aug 2015 July 2013 Sept 2014 Aug 2015 July 2013 Sept 2014 Aug 2018 July 2016 Sept 2017 Aug 2018 July 2016 Sept 2017 Director S Cooke R Canham R Ames N Stone 16 Hornby Plc Annual Report and Accounts 2016 For the 2013 awards, 40% of an award is subject to a TSR condition and 60% 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+12% p.a. A sliding scale operates between these points For the 2014 awards, 40% of an award is subject to a TSR condition and 60% 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 EPS of 5p for the year ending 31 March 2016, with full vesting for EPS of 12.2p for the year ending 31 March 2017 with a sliding scale operating between these points. For the 2015 awards, 40% of an award is subject to a TSR condition and 60% 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. Benefits and pension Policies concerning benefits, including the Group’s company car policy, are reviewed periodically. Currently, benefits in kind comprise motor cars and private health cover, both of which are non-performance related. 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. Executive Directors’ service contracts The Executive Directors do not have fixed period contracts. Payments to past Directors, policy on payment of loss of office and termination payments No payments were made to past Directors in the year ended 31 March 2016. Notice periods are set under individual service contracts but the Company has a policy for Executive Directors of a notice period of six months to be given by the Company which is extended to one year after six months’ service and of six months to be given by the individual. The compensation for loss of office is based upon the respective service contracts and the components are based on the base salary of the Director. IFRS 2 leaver provisions are applied to the PSP share scheme based upon the Directors’ service contracts. DIRECTORS’ INTERESTS Interests in shares The interests of the Directors in the shares of the Company at 31 March 2016 were: At 31 March 2016 number At 31 March 2015 number Executive Directors S Cooke Non-Executive Directors R Canham D Adams C Caminada – – 40,000 10,000 32,325 40,000 – 22,325 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. Roger Canham is also the Chairman of Phoenix Asset Management Partners who hold a substantial shareholding in Hornby Plc. On behalf of the Board David Mulligan Group Finance Director 3rd Floor The Gateway Innovation Way Discovery Park Sandwich Kent CT13 9FF 22 June 2016 17 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby PLC Annual Report and Accounts 2016 Independent auditors’ report to the members of Hornby Plc REPORT ON THE FINANCIAL STATEMENTS Our opinion In our opinion, Hornby Plc’s Group financial statements and Company financial statements (the “financial statements”): • give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 March 2016 and of the Group’s and the Company’s loss and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Emphasis of matter – Group going concern In forming our opinion on the Group financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1 to the financial statements concerning the Group’s ability to continue as a going concern. The Group’s new business plan requires additional investment. The directors plan to raise this through an equity raise of £8 million, subject to shareholder approval on 8 July 2016. In addition, a new bank facility was signed on 22 June 2016, conditional on this equity fundraising. Both the equity fund raise and the new bank facility are needed in order to finance the Group’s operations and for it to continue as a going concern for at least the next 12 months. These conditions, in particular the requirement for shareholder approval of the equity fundraising, along with the other matters explained in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. The Group financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern. What we have audited The financial statements, included within the Annual Report and Accounts (the “Annual Report”), comprise: • the Group and Company Balance Sheets as at 31 March 2016; • the Group and Company Statements of Comprehensive Income for the year then ended; • the Group and Company Cash Flow Statements for the year then ended; • the Group and Company Statement of Changes in Equity for the year then ended; and • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Statement of Directors’ Responsibilities on page 15, 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 and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. 18 Hornby PLC Annual Report and Accounts 2016 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. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). 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 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. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Rosemary Shapland (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Gatwick 22 June 2016 19 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby PLC Annual Report and Accounts 2016 Group and Company Statements of Comprehensive Income for the Year Ended 31 March 2016 Group Company Note 2 2 3 3 4 2 4 5 2016 £’000 55,757 (33,992) 21,765 (8,441) (12,472) (9,652) (4,324) (13,124) 21 (429) (13,532) (5,683) 389 (384) (7,854) (13,532) (182) (13,714) 20 (127) (107) (13,821) 2015 £’000 58,135 (30,961) 27,174 (5,937) (12,246) (7,367) (1,303) 321 1 (506) (184) 1,622 (618) (377) (811) (184) 2016 £’000 1,453 – 1,453 – – (969) (9,494) (9,010) 174 (181) (9,017) 494 – – (9,511) (9,017) 64 (120) (68) (9,085) 802 (501) 301 181 – (401) (401) (9,486) 7 7 (27.87)p (27.87)p (0.31)p (0.31)p 2015 £’000 1,346 – 1,346 – – (888) (103) 355 174 (192) 337 337 – – – 337 (51) 286 – 605 605 891 Revenue Cost of sales Gross profit Distribution costs Selling and marketing costs Administrative expenses Other operating expenses Operating (loss)/profit Finance income Finance costs (Loss)/profit before taxation Analysed as: Underlying (loss)/profit before taxation Net foreign exchange impact on intercompany loans Amortisation of intangible assets – brand names and customer lists Exceptional items (Loss)/profit before taxation Income tax (charge)/credit (Loss)/profit for the year after taxation Other comprehensive income Items that may be subsequently reclassified to profit or loss: Cash flow hedges, net of tax Currency translation differences Other comprehensive (expense)/income for the year, net of tax Total comprehensive (loss)/income for the year Loss per ordinary share Basic Diluted All results relate to continuing operations. The notes on pages 24 to 57 form part of these accounts. 20 Hornby Plc Annual Report and Accounts 2016 Group and Company Balance Sheets as at 31 March 2016 Assets Non-current assets Goodwill Intangible assets Property, plant and equipment Investments Deferred tax assets Current assets Inventories Trade and other receivables Derivative financial instruments Current tax assets Cash and cash equivalents Property, plant and equipment held for sale Liabilities Current liabilities Borrowings Trade and other payables Derivative financial instruments Provisions Current tax liabilities Net current assets 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 Group Company Note 2016 £’000 2015 £’000 2016 £’000 2015 £’000 8 9 10 11 20 12 13 19 17 14 10 18 15 19 16 17 18 20 21 4,516 4,777 7,192 – 1,991 18,476 13,637 13,192 394 213 677 1,462 29,575 8,464 4,071 10,260 – 2,099 24,894 12,469 10,444 519 419 451 – 24,302 – – – 28,398 – 28,398 – 15,329 – – 1 1,069 16,399 – – 1,207 37,326 – 38,533 – 983 – 81 1 – 1,065 (7,883) (7,363) (12) (446) – (7,747) (9,067) (24) (255) (53) – (94) – – (39) (15,704) (17,146) (133) 13,871 7,156 16,266 (116) (19) – – – (135) 930 – (211) (211) (163) (131) (294) (4,902) (100) (5,002) (4,395) (121) (4,516) 32,136 31,756 39,662 34,947 550 20,205 55 (1,386) 382 1,688 10,642 392 6,180 55 (1,259) 362 1,688 24,338 550 20,205 55 (754) – 19,145 461 392 6,180 55 (353) – 19,145 9,528 32,136 31,756 39,662 34,947 The notes on page 24 to 57 form part of these accounts. The financial statements on pages 20 to 57 were approved by the Board of Directors on 22 June 2016 and were signed on its behalf by: D Mulligan Director Registered Company Number: 01547390 21 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Group and Company Statements of Changes in Equity for the Year Ended 31 March 2016 Group Balance at 1 April 2014 Loss for the year Other comprehensive (expense)/income for the year Total comprehensive income for the year Transactions with owners Share-based payments (note 22) Total transactions with owners Balance at 31 March 2015 and 1 April 2015 Loss for the year Other comprehensive (expense)/income for the year Total comprehensive (loss)/income for the year Transactions with owners Net proceeds from issue of ordinary shares Share-based payments (note 22) Total transactions with owners Balance at 31 March 2016 Share capital £’000 392 – Share premium £’000 6,180 – – – – – – – – – Capital redemption reserve £’000 Translation reserve £’000 55 – – – – – (758) – (501) (501) – – 392 6,180 55 (1,259) – – – – – – 158 – 158 550 14,025 – 14,025 20,205 – – – – – – – (127) (127) – – – Hedging reserve £’000 (440) – Other reserves £’000 1,688 – Retained earnings £’000 24,253 (120) Total equity £’000 31,370 (120) 802 802 – – 362 – 20 20 – – – – – – – – (120) 205 205 301 181 205 205 1,688 24,338 31,756 (13,714) (13,714) – (107) (13,714) (13,821) – 18 18 14,183 18 14,201 32,136 55 (1,386) 382 1,688 10,642 Retained earnings includes £553,000 at 31 March 2016 (2015: £570,000) which is not distributable and relates to a 1986 revaluation of land and buildings. Other reserves of £1,688,000 represent historic negative goodwill arising prior to the transition to IFRS. Company Balance at 1 April 2014 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Share-based payments Total transactions with owners Share capital £’000 392 – – – – – Share premium £’000 6,180 – – – – – Balance at 31 March 2015 and 1 April 2015 392 6,180 Loss for the year Other comprehensive expense for the year Total comprehensive loss for the year Transactions with owners Net proceeds from issue of ordinary shares Share-based payments Total transactions with owners Balance at 31 March 2016 – – – 158 – 158 550 – – – 14,025 – 14,025 20,205 The notes on page 24 to 57 form part of these accounts. 22 Capital redemption reserve £’000 Translation reserve £’000 55 – – – – – 55 – – – – – – (958) – 605 605 – – (353) – (401) (401) – – – Other reserves £’000 19,145 – – – – – Retained earnings £’000 9,037 286 – 286 205 205 Total equity £’000 33,851 286 605 891 205 205 19,145 9,528 34,947 (9,085) – (9,085) (9,085) (401) (9,486) – 18 18 461 14,183 18 14,201 39,662 55 (754) 19,145 – – – – – – – – – – – – Hornby Plc Annual Report and Accounts 2016 Group and Company Cash Flow Statement for the Year Ended 31 March 2016 Cash flows from operating activities Cash (used in)/generated from operations Interest paid Tax received/(paid) Net cash (used in)/generated from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Interest received Net cash (used in)/generated from investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Repayments of loans Share issue and refinancing costs Advances to subsidiary undertakings Repayments to subsidiary undertakings Net cash generated from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash, cash equivalents and bank overdrafts at beginning of the year Effect of exchange rate movements 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 Group Company Note 27 10 9 14 18 2016 £’000 2015 £’000 (9,632) (429) 204 (9,857) 349 (3,221) (1,341) 21 (4,192) 15,000 (35) (817) – – 14,148 99 (7,247) 119 (7,029) 677 (7,706) (7,029) 5,328 (506) (127) 4,695 20 (4,073) (988) 1 (5,040) – (1,584) – – – (1,584) (1,929) (5,456) 138 (7,247) 451 (7,698) (7,247) 2016 £’000 294 (181) 31 144 342 – – 174 516 15,000 – (817) (14,843) – (660) – 1 – 1 1 – 1 2015 £’000 (194) (192) 67 (319) – – – 174 174 – – – 116 29 145 – 1 – 1 1 – 1 23 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES Accounting policies for the year ended 31 March 2016 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 2016 has been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’), IFRS Interpretations Committee (‘IFRS-IC’) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs. The consolidated Group and Parent Company financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities (including derivative instruments) at fair value through profit or loss. However, with regards to the Group, see below for details of material uncertainty. The preparation of financial statements in conformity with IFRSs 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. Going concern The Group’s new business plan requires additional investment, so the Group is proposing to raise £8 million additional equity to enable management to pursue this plan. The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group’s bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016. The Group has prepared cash flow forecasts on the basis of the additional equity raise and new bank facility and following a detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, the Financial Statements continue to adopt the going concern basis of accounting in preparing the annual financial statements. However, as the current fundraise has not yet been approved by shareholders prior to approval of these financial statements there remains a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. 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 non-controlling 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 concerned. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 24 Hornby Plc Annual Report and Accounts 2016 Adoption of new and revised standards The Group applied all applicable new standards, interpretations and amendments published by the IASB and as endorsed by the European Union for the year beginning 1 January 2015, being IFRS 10, IFRS 11, IFRS 16, IAS 7, IAS 12 and amendments to IAS 1, IAS 16, IAS 19, IAS 27, IAS 28 and IAS 38. The implementation of these standards and amendments did not have a material effect on the accounts. The Group did not early adopt any standard, interpretation, or amendments published by the IASB and endorsed by the European Union for which the mandatory application date is after 1 January 2014. The following new standards, interpretations, and amendments to standards and interpretations have been issued, subject to the EU endorsement, but are not effective for the financial year beginning 1 January 2014 and have not yet been early adopted by the Group: IFRS 9 ‘Financial Instruments’ IFRS 15 ‘Revenue from Contracts with Customers’ IFRS 16 ‘Leases’ IAS 7 ‘Statement of cash flows’ IAS 12 ‘Income tax’ Amendments to IFRS 10 and IAS 28 ‘Sale or Contribution of Assets between an Investor and its Associate or Joint Venture’ Amendments to IFRS 11 ‘Accounting for Acquisitions of interests in Joint Operations’ Amendments to IAS 1 ‘Presentation of financial statements’ Amendments to IAS 16 and IAS 38 ‘Clarification of Acceptable Methods of Depreciation and Amortisation’ Amendments to IAS 19 ‘Defined Benefit Plans: Employee Contributions’ Amendments to IAS 27 ‘Equity Method in Separate Financial Statements’ Effective date for periods beginning on or after 1 January 2018 1 January 2017 1 January 2019 1 January 2017 1 January 2017 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 July 2014 1 January 2016 With the exception of IFRS 16 ‘Leases’ the Group does not currently expect any of these changes to have a material impact on the results. IFRS 16 will replace the current guidance under IAS 17 and will have a significant impact on the accounting by lessees in particular. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 will require lessees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The adoption of IFRS 16 will have a material effect on the Hornby Plc financial statements. Reconciliation of statutory to non-statutory information in the Chairman’s statement and operating and financial review Underlying (loss)/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 and amortisation of intangibles which result from historical acquisitions. Additionally, exceptional items including restructuring costs and impairments to goodwill, add volatility and these are considered to be one-off items and therefore have also been added back in calculating underlying (loss)/profit before taxation. Group Loss before taxation Net foreign exchange impact on intercompany loans Amortisation of intangibles Exceptional items: Restructuring costs Implementation of new ERP system Refinancing costs Profit on disposal of property Impairment of property, plant and equipment – tooling Impairment of goodwill Underlying (loss)/profit before taxation 2016 £’000 (13,532) (389) 384 993 1,174 762 (223) 1,158 3,990 2015 £’000 (184) 618 377 811 – – – – – (5,683) 1,622 25 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 1. SIGNIFICANT ACCOUNTING POLICIES continued The Statements of Comprehensive Income discloses foreign exchange movements, amortisation of intangibles and exceptional items. Further detail of the exceptional items is included in note 4. Revenue recognition Revenue is measured at 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) Sale of goods Sales of goods are recognised when a Group entity has delivered products to the customer. The customer is either a trade customer or the consumer when sold through Hornby concessions in various retail outlets, or via the internet. (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 revenue in anticipation of customer returns of goods sold in the period. (d) Hornby Visitor Centre Revenue is generated from the ticket and product sales at our Visitor Centre in Margate and recognised at the point of sale. 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. Exceptional items Where items of income and expense included in the Statements of Comprehensive Income are considered to be material and exceptional in nature, separate disclosure of their nature and amount is provided in the financial statements. These items are classified as exceptional items. The Group considers the size and nature of an item both individually and when aggregated with similar items when considering whether it is material, for example impairment of intangible assets or restructuring costs. 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 Company 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 and after 1 April 2004, the date of transition to IFRSs, is not subject to amortisation but tested for impairment on an annual basis. Intangible assets, excluding goodwill, arising on a business combination subsequent to 1 April 2004, are separately identified and valued, and subject to amortisation over their estimated economic lives. 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 (‘CGUs’) for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose identified according to operating segment. Goodwill is recorded in the currency of the CGU to which it is allocated. 26 Hornby Plc Annual Report and Accounts 2016 Intangibles (a) Brand names Brand names, acquired as part of a business combination, 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 brand names over their estimated economic life of 15–20 years. Brand names have been valued on a ‘relief from royalty’ basis. (b) Customer lists Customer lists, acquired as part of a business combination, 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 ten years. Customer lists have been valued according to discounted incremental operating profit expected to be generated from each of them over their useful lives. (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. (d) Computer software Computer software expenditure is capitalised at the value at the date of acquisition and depreciated over a useful economic life of 4–6 years. Property, plant and equipment Land and buildings are shown at cost less accumulated depreciation. Assets revalued prior to the transition to IFRSs use this valuation as deemed cost at this date. Other property, plant and equipment 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 its residual value, 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 four years. 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 CGUs. 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 IFRSs use this valuation as deemed cost at this date. Dividend income is shown separately in the Statements of Comprehensive Income. 27 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 1. SIGNIFICANT ACCOUNTING POLICIES continued 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 used 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, 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. Assets held for sale Individual, formerly non-current assets, which are expected to be sold within the next twelve months, are measured at the lower of their carrying amount at the time they are reclassified and selling price less further costs expected to be incurred to disposal. Financial instruments Financial assets and financial liabilities are recognised in the Group and Company’s balance sheet when the Group or Company 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 and Company after deducting all of its liabilities. Equity instruments issued by the Group and Company are recorded at the proceeds received, net of direct issue costs. 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 Statements 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 and subsequently amortised over the life of the facility. 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. Sales returns provisions Provisions for sales returns are recognised when the Group has a constructive obligation as a result of a past event. Provisions for sales returns are measured at the present value of the expenditure expected to be required to settle the obligation. 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 Statements 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. 28 Hornby Plc Annual Report and Accounts 2016 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 income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities, and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 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 Statements of Comprehensive Income. Critical judgements in applying the accounting policies 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. Whenever there is a substantiated risk that an item of stock’s sellable value may be lower than its actual stock value, a provision for the difference between the two values is made. Management review the stock holdings on a regular basis and consider where a provision for excess or obsolete stock should be made based on expected demand for the stock and its condition. The provision for sales returns is based on historic returns data applied to sales for the current year and this provision is reviewed by management on an ongoing basis. Specific debtors are provided for when there is significant doubt that a repayment of debt will be fulfilled considering specific knowledge of the customer and sales terms of the debt outstanding. The critical areas of judgement applied within the impairment reviews conducted include the weighted average cost of capital used in discounting the cash flows of the CGUs, the assessment of the initial growth rate used, the growth rate in perpetuity of the cash flows and the forecast operating profits of the CGUs. The judgements used within this assessment are set out within note 8. The critical areas of judgement used in the share-based payment charge for the year include the assessment of the fair value of the option along with the expected volatility and option term. These are based on historical data where this is available and best estimates where historical data is not available. Further details in relation to share-based payments are given in note 22. The deferred tax assets are assessed based on the current trading performance, expected future cash flows in the specific countries and the nature of the tax base. The fair value of the financial derivatives is determined by the mark to market value at the year end date. Provisions 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 Statements of Comprehensive Income net of any reimbursement but only if reimbursement is virtually certain and will be settled simultaneously. 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. 29 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 1. SIGNIFICANT ACCOUNTING POLICIES continued Cash and cash equivalents Cash and cash equivalents for the purpose of the cash flow statement includes cash in hand, deposits at 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 two share-based payment plans: • Share Option Scheme (‘SGS’) • Performance Share Plan (‘PSP’) 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. The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Company is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity. 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. 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 three-year performance conditions: • Total Shareholder Return (‘TSR’) • Earnings per share (‘EPS’) growth targets each applying to a separate 40%:60% of the award respectively and vesting on the third anniversary of grant as appropriate. The method applied in estimating the fair value of the PSP awards is the Black-Scholes model. The TSR fair value and the projected EPS award fair value are spread over the vesting period of the shares and recognised in the Statements 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 Statements 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 total 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 current and non-current payables. 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. Leases classed as operating leases are expensed on a straight-line basis to the Statements of Comprehensive Income over the lease term. 30 Hornby Plc Annual Report and Accounts 2016 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 US Dollars. It enters into forward currency contracts to hedge the cash flows of its product sourcing operation (i.e. it buys US Dollars forwards in exchange for Sterling) and looks forward six to twelve months on a rolling basis at forecasted purchase volumes. The policy framework requires hedging between 70% and 100% of anticipated import purchases that are denominated in US Dollars. The Company has granted Euro denominated intercompany loans to subsidiary companies that are translated to Sterling at statutory period ends thereby creating exchange gains or losses. The loans to the subsidiaries, Hornby Deutschland GmbH, Hornby Italia s.r.l and Hornby France S.A.S are classified as long-term loans and therefore the exchange gains and losses on consolidation are reclassified to the translation reserve in Other Comprehensive Income as per IAS 21. The loan to the branch in Spain is classified as a long-term loan however repayable on a shorter timescale than those of the other subsidiaries and therefore the exchange gains or losses are taken to Statements of Comprehensive Income. (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 borrowings comprised a revolving credit facility, bank overdrafts and a fixed-term loan agreement. (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 At 31 March 2016 the Group had a revolving credit facility of £10 million expiring in August 2019. Borrowings in the year ended 31 March 2016 peaked at £12.9 million under the Group’s previous revolving credit facility of £13 million. The needs are determined by monitoring forecast and actual cash flows. The Group regularly monitors its performance against its banking covenants to ensure compliance. The Group has recently been successful in renegotiating its main UK banking facilities for a further three-and-a-half years. The proposed £8 million equity placing has allowed us to reduce reliance on debt facilities and we have signed a new revolving credit facility of £10 million with our main UK bankers Barclays. This facility is conditional on the equity raising being approved by shareholders which is expected to allow sufficient headroom for trading working capital and capital expenditure needs through to December 2019. Derivative financial instruments To manage exposure to foreign currency risk, the Group uses foreign currency forward contracts, 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 remeasured 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 Other Comprehensive Income. The gain or loss relating to the ineffective portion is recognised immediately in the Statements of Comprehensive Income within operating expenses. Amounts accumulated in Other Comprehensive Income are recycled in the Statements 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 Statements 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 the Other Comprehensive Income are transferred from Other Comprehensive Income 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. 31 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 1. SIGNIFICANT ACCOUNTING POLICIES continued 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 in income when the forecast transaction is ultimately recognised in the Statements of Comprehensive Income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss is immediately transferred to the Statements of Comprehensive Income. (b) Derivatives that do not qualify for hedge accounting Certain derivative instruments are not considered effective and do not qualify for hedge accounting. Such derivatives are classified at fair value through the Statements of Comprehensive Income, and changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognised immediately in the Statements 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 approximate to their book values. The fair values of the derivative financial instruments used for hedging purposes are disclosed in note 19. Foreign currency Transactions denominated in foreign currencies are recorded in the relevant functional currency at the exchange rates ruling at the date of the transaction. Foreign exchange gains and losses resulting from such transactions are recognised in the Statements of Comprehensive Income, except when deferred and disclosed in Other Comprehensive Income 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 Statements of Comprehensive Income. Foreign exchange gains/losses recognised in the Statements of Comprehensive Income relating to foreign currency loans and other foreign exchange adjustments are included within operating profit. On consolidation, the Statements 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 Other Comprehensive Income. Dividend distribution Final dividends are recorded in the Statements of Changes in Equity 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 the rest of Europe. Although the USA 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 Group and Company Statements of Comprehensive Income on page 20 and its assets and liabilities given in the Group and Company Balance Sheets on page 21. Other Company information is provided in the other notes to the accounts. 32 Hornby Plc Annual Report and Accounts 2016 Year ended 31 March 2016 Revenue – External – Other segments Operating loss Finance cost – External – Other segments Finance income – External – Other segments Loss before taxation Analysed as: Underlying loss before taxation Net foreign exchange impact on intercompany loans Amortisation of intangibles Restructuring costs Implementation of new ERP system Refinancing costs Profit on disposal of property Impairment of tooling Impairment of goodwill Loss before taxation Taxation 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 Impairment of goodwill Share-based payment UK £’000 42,562 6,534 (3,801) (379) (175) 21 542 (3,792) USA £’000 3,080 – (4) – – – – (4) Spain £’000 2,470 2,250 (7,214) (38) (181) – – (7,433) Rest of Europe £’000 5,370 822 (1,577) (9) (56) – – Total Reportable Segments £’000 55,757 10,302 (13,124) (429) (542) 21 542 Intra Group £’000 – (10,302) – – 542 – (542) Italy £’000 2,275 696 (528) (3) (130) – – (661) (1,642) (13,532) (2,100) (4) (2,017) (471) (1,091) (5,683) 389 (264) (332) (814) (762) 223 (132) – (3,792) (182) (3,974) 55,604 (20,918) 1,752 36,438 14,036 – 207 14,243 3,393 2,447 389 603 – 18 – – – – – – – – (4) – (4) 1,704 (53) – 1,651 1,923 (1,774) – 149 13 21 – – – – – – (312) (88) – – (1,026) (3,990) (7,433) – (7,433) 5,088 (720) – 4,368 11,141 (10,635) 4 510 1,113 1,059 – – 3,990 – – (71) (15) (104) – – – _ (661) – – (49) (334) (168) – – – – 389 (384) (993) (1,174) (762) 223 (1,158) (3,990) (1,642) (13,532) – (182) (661) (1,642) (13,714) 3,673 (1,051) 157 2,779 4,414 (4,026) – 388 39 162 – 71 – – 3,696 (1,176) 295 69,765 (23,918) 2,204 (23,918) 23,918 – 2,815 48,051 – 5,799 (5,174) – 37,313 (21,609) 211 (21,609) 21,609 – 625 15,915 4 16 – 49 – – 4,562 3,705 389 723 3,990 18 – _ – – – – – – – – – – – – – – – – – – All transactions between Group companies are on normal commercial terms. Group £’000 55,757 _ (13,124) (429) – 21 – (13,532) (5,683) 389 (384) (993) (1,174) (762) 223 (1,158) (3,990) (13,532) (182) (13,714) 45,847 – 2,204 48,051 15,704 – 211 15,915 4,562 3,705 389 723 3,990 18 33 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 2. SEGMENTAL REPORTING continued Year ended 31 March 2015 Revenue – External – Other segments Operating profit/(loss) Finance cost – External – Other segments Finance income – External – Other segments (Loss)/profit before taxation Analysed as: Underlying profit/(loss) before taxation Net foreign exchange impact on intercompany loans Amortisation of intangibles Restructuring costs (Loss)/profit before taxation Taxation (Loss)/profit 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 Impairment of goodwill Share-based payment Intra Group £’000 – (9,321) – – 394 – (394) – – – – – – – – UK £’000 41,477 3,028 46 (406) – 1 394 35 USA £’000 3,349 – 125 – – – – 125 Spain £’000 2,836 6,093 111 (72) (193) – – (154) Italy £’000 4,079 200 315 (12) (137) – – 166 Rest of Europe £’000 6,394 – (276) (16) (64) – – (356) Total Reportable Segments £’000 58,135 9,321 321 (506) (394) 1 394 (184) 1,566 125 (154) 265 (180) 1,622 (618) (264) (649) 35 262 297 41,095 (13,198) 2,092 29,989 22,955 (10,524) 122 12,553 3,563 2,550 618 264 – 205 – – – 125 (39) 86 1,538 (4) – 1,534 1,525 (1,391) 41 – – – (154) (92) (246) 10,431 (915) 31 9,547 9,133 (6,446) 4 175 2,691 19 22 – – – – 1,243 1,020 – – – – – (83) (16) 166 (170) (4) 4,514 (238) 139 4,415 4,526 (3,303) 17 1,240 234 141 – 83 – – (618) (377) (811) (184) 64 (120) – (30) (146) (356) 103 (253) 3,517 (62) 256 3,711 3,967 (3,186) – 61,095 (14,417) 2,518 49,196 42,106 (24,850) 184 (14,417) 14,417 – – (24,850) 24,850 – 781 17,440 2 16 – 30 – – 5,061 3,749 – – – – – – – – – – – Group £’000 58,135 – 321 (506) – 1 – (184) 1,622 (618) (377) (811) (184) 64 (120) 46,678 – 2,518 49,196 17,256 – 184 17,440 5,061 3,749 618 377 – 205 All transactions between Group companies are on normal commercial terms. 34 Hornby Plc Annual Report and Accounts 2016 3. FINANCE COSTS Group Company Finance costs: Interest expense on bank borrowings Interest expense on intercompany borrowings Finance income: Bank interest Interest income on intercompany loans 2016 £’000 (429) – (429) 21 – 21 2015 £’000 (506) – (506) 1 – 1 Net finance costs (408) (505) 2016 £’000 – (181) (181) – 174 174 (7) 2015 £’000 – (192) (192) – 174 174 (18) 4. (LOSS)/PROFIT BEFORE TAXATION The following items have been included in arriving at (loss)/profit before taxation: Staff costs (note 23) Inventories: – Cost of inventories recognised as an expense (included in cost of sales) – Stock provision Depreciation of property, plant and equipment: – Owned assets Profit/(loss) on disposal of fixed 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 (gains)/losses: – On trading transactions and ineffective hedges Impairment of trade receivables Share-based payment charge Other operating expenses: – Foreign exchange on trading transactions – Net impact of foreign exchange on intercompany loans – Movement on fair value of ineffective hedge – Amortisation of intangible assets – brands Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 11,010 10,210 1,147 1,160 26,808 (895) – 3,705 193 125 1,058 171 1,760 (135) 163 18 (822) (389) 135 384 25,400 (179) 3,749 (5) 142 446 82 1,810 135 40 205 205 618 (102) 377 – – 19 223 – – – – – – (48) – – – – – – 34 – – – – – – – 103 – – – – 35 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 continued Notes to the Financial Statements continued 4. (LOSS)/PROFIT BEFORE TAXATION continued Exceptional items comprise: – Restructuring costs – Implementation of ERP system – Refinancing – Profit on disposal of property – Impairment of property, plant and equipment – Impairment of goodwill – Impairment of investment Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 993 1,174 762 (223) 1,158 3,990 – 7,854 811 – – – – – – 811 – – 191 (223) – – 9,543 9,511 – – – – – – – – The exceptional items totalling £7.9 million (2015: £0.8 million) include restructuring costs (£1.0 million) relating to the reorganisation of the European management teams and the costs of running the Margate site, impairment of goodwill (£4.0 million) following the decision to restructure the European businesses, impairment of tooling (£1.1 million) following the decision to discontinue certain product lines as part of the new business plan, costs relating to the implementation of the new ERP system (£1.2 million), costs relating to the 2015 equity issue and bank refinancing (£0.8 million) less the profit on the sale of part of the Margate site (£0.2 million). Services provided by the Company’s auditors and network firms During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditors and network firms as detailed below: Group Company 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 the Company’s subsidiaries – Audit-related assurance services – Tax advisory services – Tax compliance services – Other advisory work 2016 £’000 103 39 5 19 1 – 2015 £’000 2016 £’000 2015 £’000 99 37 25 31 28 34 15 39 – – – – 54 15 – 25 – 5 – 45 In the current financial year the level of non-audit fees was within the 1:1 ratio to audit fees as per Audit Committee policy. 167 254 36 Hornby Plc Annual Report and Accounts 2016 continued 5. TAXATION Analysis of tax charge/(credit) in the year Current tax – UK taxation adjustments in respect of prior years – overseas taxation adjustments in respect of prior years Deferred tax (note 20) – current year – overseas taxation – adjustments in respect of prior years – effect of tax rate change on opening balance Total tax charge/(credit) to the loss before tax Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 – (43) (8) – (51) (569) 348 255 199 233 182 (7) 103 138 – 234 (216) 60 (142) – (298) (64) 89 – – – 89 (3) – (7) (11) (21) 68 99 – (43) – 56 (2) – (3) – (5) 51 The tax for the year differs to the standard rate of corporation tax in the UK of 20%. Any differences are explained below: (Loss)/profit before taxation (Loss)/profit on ordinary activities multiplied by rate of corporation tax in UK of 20% (2015: 21%) Effects of: Adjustments to tax in respect of prior years Permanent timing differences Difference on overseas rates of tax Impact of overseas losses not recognised Remeasurement of deferred tax – change in UK tax rate to 18% Other Total taxation Group Company 2016 £’000 (13,532) 2015 £’000 (184) 2016 £’000 (9,017) 2015 £’000 337 (2,706) (39) (1,803) 212 1,208 (486) 1,755 199 – 182 (39) – 18 12 – (16) (64) (7) 1,889 – – (11) – 68 71 (5) – (15) – – – 51 The standard rate of corporation tax in the UK changed from 21% to 20% with effect from 1 April 2015. Accordingly, the Company’s profits for this accounting period are taxed at an effective rate of 20%. The UK corporation tax rate is due to decrease further to 19% on 1 April 2017 and 17% on 1 April 2020, however, the latter is yet to be substantively enacted. UK deferred tax balances have been restated in these accounts and carried forward at a rate of 18%, being the current rate substantively enacted for periods from 1 April 2020 onwards. 37 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 6. DIVIDENDS No interim or final dividends were paid in relation to the year ended 31 March 2015 and no interim dividend has been paid in relation to the year ended 31 March 2016. The Directors are not proposing a final dividend in respect of the financial year ended 31 March 2016. 7. (LOSS)/EARNINGS PER SHARE Basic loss per share is calculated by dividing the loss 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 loss 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 2016. For the year ended 31 March 2016, there was no difference in the weighted average number of shares used for basic and diluted net loss per ordinary share as the effect of all potentially dilutive ordinary shares was nil as both the outstanding options and PSP awards have not vested. Reconciliations of the (loss)/earnings and weighted average number of shares used in the calculations are set out below. Reported Basic loss per share Loss attributable to ordinary shareholders Effect of dilutive securities Options Diluted loss per share Underlying (Loss)/earnings attributable to ordinary shareholders Amortisation of intangibles Restructuring costs Implementation of new ERP system Refinancing Profit on disposal of property Impairment of PPE – tooling Impairment of goodwill Net foreign exchange translation adjustments Underlying basic (loss)/earnings/EPS Underlying diluted (loss)/earnings/EPS 2016 Weighted average number of shares ’000 (Loss)/ earnings £’000 Per-share amount pence (Loss)/ earnings £’000 2015 Weighted average number of shares ’000 Per-share amount pence (13,714) 49,200 (27.87) (120) 39,164 (0.31) – – – – – – (13,714) 49,200 (27.87) (120) 39,164 (0.31) (13,714) 307 794 939 610 (178) 1,158 3,990 (311) 49,200 – – – – – – – – (6,405) 49,200 (6,405) 49,200 (27.87) 0.62 1.61 1.91 1.24 (0.36) 2.36 8.11 (0.64) (13.02) (13.02) (120) 302 649 – – – – – 494 1,325 1,325 39,164 – – – – – – – – 39,164 39,164 (0.31) 0.77 1.66 – – – – – 1.26 3.38 3.38 The above numbers used to calculate the EPS for the year ended 31 March 2016 and 31 March 2015 have been tax effected at the rate of 20% respectively with the exception of Hornby Spain where the net deferred tax asset associated with the impairment in 2016 has not been recognised. 38 Hornby Plc Annual Report and Accounts 2016 8. GOODWILL Group Cost At 1 April 2015 Exchange adjustments At 31 March 2016 Aggregate impairment At 1 April 2015 Charge for the year Exchange adjustments At 31 March 2016 Net book amount at 31 March 2016 Cost At 1 April 2014 Exchange adjustments At 31 March 2015 Aggregate impairment At 1 April 2014 Charge for the year Exchange adjustments At 31 March 2015 Net book amount at 31 March 2015 Net book amount at 31 March 2014 The Company has no goodwill. £’000 12,973 34 13,007 4,509 3,990 (8) 8,491 4,516 13,027 (54) 12,973 4,497 – 12 4,509 8,464 8,530 The goodwill has been allocated to CGUs and a summary of carrying amounts of goodwill by geographical segment (representing CGUs) at 31 March 2016 is as follows: Group At 31 March 2016 At 31 March 2015 UK £’000 3,992 3,992 USA £’000 8 8 Spain £’000 – 3,990 Italy £’000 – – France £’000 337 295 Germany £’000 179 179 Total £’000 4,516 8,464 Goodwill allocated to the above CGUs of the Group has been measured based on benefits each geographical segment is expected to gain from the business combination. Impairment tests for goodwill Management reviews the business performance based on geography. Budgeted revenue was based on expected levels of activity given results to date, together with expected economic and market conditions. Budgeted operating profit was calculated based upon management’s expectation of operating costs appropriate to the business as reflected in the new business plan. 39 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 8. GOODWILL continued The relative risk adjusted (or ‘beta’) discount rate applied reflects the risk inherent in hobby based product companies. In determining this 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 2017. Subsequent cash flows for the following two years have been increased in line with expectation of 4% growth based on the three year working capital model adopted by the business which incorporates the Group’s strategy to integrate the European operations, reducing costs and opening up new revenue opportunities, particularly through e-commerce. This model has been reviewed with external advisors as part of the recent refinancing process. Cash flows beyond the four-year period are extrapolated using the estimated growth rates stated below. The cash flows were discounted using a pre-tax discount rate of 13% (2015: 10%) which management believes is appropriate for all territories. The key assumptions used for value-in-use calculations for the year ended 31 March 2016 are as follows: Group Gross Margin1 Growth rate to perpetuity2 UK (Corgi) 46.2% 1.0% UK (Humbrol) 46.2% 1.0% France 59.7% 1.0% Spain 59.7% 1.0% Italy Germany 59.7% 1.0% 59.7% 1.0% The key assumptions used for value-in-use calculations for the year ended 31 March 2015 are as follows: Group Gross Margin1 Growth rate to perpetuity2 UK (Corgi) 30.3% 2.0% UK (Humbrol) 47.0% 2.0% France 37.9% 2.0% Spain Italy Germany 22.62% 2.0% 32.4% 2.0% 26.06% 2.0% 1. Budgeted gross margin. 2. Weighted average growth rate used to extrapolate cash flows beyond the budget period. These assumptions have been used for the analysis of each CGU within the operating segments. For the UK CGU, the recoverable amount calculated based on value in use exceeded carrying value by £19.3 million. A reduction in operating profit by 50%, or a rise in discount rate to 29% would remove the remaining headroom. For the France CGU, the recoverable amount calculated based on value in use exceeded carrying value by £317,000. A reduction in operating profit by 24%, or a rise in discount rate to 20% would remove the remaining headroom. For the Germany CGU, the recoverable amount calculated based on value in use exceeded carrying value by £5,000. A reduction in operating profit by 1%, or a rise in discount rate to 14% would remove the remaining headroom. 9. INTANGIBLE ASSETS Group Intangible assets Cost At 1 April 2015 Additions Exchange adjustments At 31 March 2016 Accumulated amortisation At 1 April 2015 Charge for the year Exchange adjustments At 31 March 2016 Net book amount at 31 March 2016 40 Brand names £’000 Customer lists £’000 Computer software £’000 Total £’000 4,683 – 130 4,813 1,897 263 43 2,203 2,610 1,372 – 33 1,405 1,075 121 32 1,228 177 988 1,341 – 2,329 – 339 – 339 1,990 7,043 1,341 163 8,547 2,972 723 75 3,770 4,777 Hornby Plc Annual Report and Accounts 2016 Group Intangible assets Cost At 1 April 2014 Additions Exchange adjustments At 31 March 2015 Accumulated amortisation At 1 April 2014 Charge for the year Exchange adjustments At 31 March 2015 Net book amount at 31 March 2015 Net book amount at 31 March 2014 Brand names £’000 Customer lists £’000 Computer software £’000 Total £’000 4,887 – (204) 4,683 1,756 240 (99) 1,897 2,786 3,131 1,423 – (51) 1,372 985 137 (47) 1,075 297 438 – 988 – 988 – – – – 988 – 6,310 988 (255) 7,043 2,741 377 (146) 2,972 4,071 3,569 All amortisation charges in the year have been charged in other operating expenses. The Company held no intangible assets. 10. PROPERTY, PLANT AND EQUIPMENT Group Cost At 1 April 2015 Exchange adjustments Additions at cost Transfer to current assets held for sale Disposals At 31 March 2016 Accumulated depreciation At 1 April 2015 Exchange adjustments Charge for the year Transfer to current assets held for sale Impairment Disposals At 31 March 2016 Net book amount at 31 March 2016 Freehold land and buildings £’000 Plant and equipment £’000 Motor vehicles £’000 Tools and moulds £’000 Total £’000 2,952 47 – (2,999) – – 1,371 47 32 (1,450) – – – – 6,598 88 395 – (275) 6,806 5,156 75 544 – – (239) 5,536 1,270 239 6 – – (51) 194 230 7 – – – (43) 194 55,039 1,030 2,826 – (94) 58,801 47,811 882 3,129 – 1,158 (101) 64,828 1,171 3,221 (2,999) (420) 65,801 54,568 1,011 3,705 (1,450) 1,158 (383) 52,879 58,609 – 5,922 7,192 The impairment charge in the year relates to tooling held in Hornby España S.A. and Hornby Hobbies Limited, which management no longer intend to use in the medium term operations of the business. 41 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 10. PROPERTY, PLANT AND EQUIPMENT continued Group Cost At 1 April 2014 Exchange adjustments Additions at cost Disposals At 31 March 2015 Accumulated depreciation At 1 April 2014 Exchange adjustments Charge for the year Disposals At 31 March 2015 Net book amount at 31 March 2015 Net book amount at 31 March 2014 Freehold land and buildings £’000 Plant and equipment £’000 Motor vehicles £’000 Tools and moulds £’000 Total £’000 3,026 (74) – – 2,952 1,346 (22) 47 – 1,371 1,581 1,680 6,172 (93) 531 (12) 6,598 4,719 (73) 522 (12) 5,156 1,442 1,453 249 (10) – – 239 234 (8) 4 – 230 9 15 53,178 (1,455) 3,542 (226) 62,625 (1,632) 4,073 (238) 55,039 64,828 45,943 (1,097) 3,176 (211) 52,242 (1,200) 3,749 (223) 47,811 54,568 7,228 7,235 10,260 10,383 Freehold land amounting to £786,000 (2015: £786,000) has not been depreciated. The Group holds no finance leases (2015: none). 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 to IFRSs as deemed cost. All other assets are stated at cost. Company Cost At 1 April 2015 Transfer to current assets held for sale At 31 March 2016 Accumulated depreciation At 1 April 2015 Charge for the year Transfer to current assets held for sale At 31 March 2016 Net book amount at 31 March 2016 Company Cost At 1 April 2014 and at 31 March 2015 Accumulated depreciation At 1 April 2014 Charge for the year At 31 March 2015 Net book amount at 31 March 2015 Net book amount at 31 March 2014 Freehold land and buildings £’000 Plant and equipment £’000 2,428 (2,428) – 1,221 19 (1,240) – – 4 – 4 4 – – 4 – Freehold land and buildings £’000 Plant and equipment £’000 2,428 1,187 34 1,221 1,207 1,241 4 4 – 4 – – Total £’000 2,432 (2,428) 4 1,225 19 (1,240) 4 – Total £’000 2,432 1,191 34 1,225 1,207 1,241 The Company does not hold any assets under finance leases. Freehold land amounting to £786,000 (2015: £786,000) has not been depreciated. 42 Hornby Plc Annual Report and Accounts 2016 Property, plant and equipment held for sale At 31 March 2016 the Group had a clear intention to sell the land and buildings held by the Company and by its subsidiary Hornby España S.A. and remain in a sales process for both sites. These assets have been reclassified as current assets under IFRS 5. During the year the Group sold part of the land and buildings held for sale. Group Company Freehold land and buildings Cost At 1 April 2015 Transfer from non-current assets Disposals At 31 March 2016 Accumulated depreciation At 1 April 2015 Transfer from non-current assets Disposals At 31 March 2016 Net book amount at 31 March 2016 Net book amount at 31 March 2015 2016 £’000 2015 £’000 2016 £’000 2015 £’000 – 2,999 (258) 2,741 – 1,418 (139) 1,279 1,462 – – – – – – – – – – – – 2,428 (258) 2,170 – 1,240 (139) 1,101 1,069 – – – – – – – – – – – 11. INVESTMENTS Company The movements in the net book value of interests in subsidiary undertakings are as follows: Interests in subsidiary undertakings at valuation £’000 Loans to subsidiary undertakings at cost £’000 At 1 April 2015 Capital contribution relating to share-based payment Net increase in loans to subsidiary undertaking Impairment of investment in subsidiary undertakings At 31 March 2016 At 1 April 2014 Capital contribution relating to share-based payment At 31 March 2015 33,155 (48) – (9,543) 23,564 33,053 102 33,155 Total £’000 37,326 (48) 663 (9,543) 4,171 – 663 – 4,834 28,398 4,171 – 4,171 37,224 102 37,326 Interest was charged on loans to subsidiary undertakings at Sterling three-month LIBOR +3.6%. Loans are unsecured and exceed five years’ maturity. The impairment of investments in the year relates to a write down to the investments held in Italy, France, Spain and the United Kingdom. 43 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 11. INVESTMENTS continued Group subsidiary undertakings Details of the undertakings whose results or financial position affected the figures shown in the Company’s annual accounts, are set out below. Hornby Hobbies Limited and Hornby España S.A. are engaged in the development, design, sourcing and distribution of models. Hornby America Inc., Hornby Italia s.r.l., Hornby France S.A.S. and Hornby Deutschland GmbH are distributors of models. Hornby Industries Limited and H&M (Systems) Limited are dormant companies. Proportion of nominal value of issued shares held Hornby Hobbies Limited Hornby America Inc. Hornby España S.A. Hornby Italia s.r.l. Hornby France S.A.S. Hornby Deutschland GmbH Hornby Industries Limited H&M (Systems) Limited 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 Amounts owed by subsidiary undertaking Country of incorporation Description of shares held Group % Company % United Kingdom USA Spain Italy France Germany United Kingdom United Kingdom Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 – 57 13,580 13,637 917 101 11,451 12,469 – – – – – – – – Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 12,303 (540) 11,763 103 1,326 – 9,569 (375) 9,194 681 569 – 13,192 10,444 – – – – 74 15,255 15,329 – – – – 12 971 983 Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated and therefore the provision for receivables impairments are deemed adequate. Credit insurance policies are in place in Hornby España S.A., Hornby Italia s.r.l., Hornby France S.A.S. and Hornby Deutschland GmbH covering trade receivables at 31 March 2016 to the value of £1.4 million (2015: £2.3 million). 44 Hornby Plc Annual Report and Accounts 2016 Gross trade receivables can be analysed as follows: Fully performing Past due Fully impaired Trade receivables 2016 £’000 9,939 1,824 540 12,303 2015 £’000 7,096 2,098 375 9,569 As of 31 March 2016, trade receivables of £1,824,000 (2015: £2,098,000) 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 2016 £’000 1,451 373 1,824 2015 £’000 1,928 170 2,098 As of 31 March 2016, trade receivables of £540,000 (2015: £375,000) were impaired and provided for. The amount of provision was £540,000 (2015: £375,000) as of 31 March 2016. Significant financial difficulties of the customer, probability that the customer 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 2016 £’000 57 483 540 2016 £’000 375 163 (23) 25 540 2015 £’000 23 352 375 2015 £’000 377 40 (22) (20) 375 The charge relating to the increase in provision has been included in ‘administrative expenses’ in the Statements of Comprehensive Income. The carrying amounts of the Group and Company trade and other receivables are denominated in the following currencies: Sterling intercompany Sterling Euro US Dollar Hong Kong Dollar Group Company 2016 £’000 – 7,648 3,907 311 – 2015 £’000 – 5,617 4,307 465 55 11,866 10,444 2016 £’000 15,255 – – – – 15,255 2015 £’000 971 12 – – – 983 45 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 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 Charge to Statements of Comprehensive Income Utilised in the year At 31 March Group Company 2016 £’000 677 2015 £’000 451 2016 £’000 1 2015 £’000 1 Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 5,306 797 564 696 7,363 5,114 950 1,041 1,962 9,067 – 14 – 80 94 – 19 – – 19 Group Company 2016 £’000 255 784 (593) 446 2015 £’000 238 597 (580) 255 2016 £’000 2015 £’000 – – – – – – – – 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 AND LIABILITIES Current tax assets UK corporation tax recoverable Overseas corporation tax recoverable Current tax liabilities UK corporation tax liability Overseas corporation tax liability Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 168 45 213 – – – 371 48 419 – 53 53 – – – 39 – 39 50 31 81 – – – 46 Hornby Plc Annual Report and Accounts 2016 18. BORROWINGS Secured borrowing at amortised cost Bank overdrafts Bank loan Loan from subsidiary undertakings Total borrowings Amount due for settlement within twelve months Amount due for settlement after twelve months Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 7,706 177 – 7,883 7,883 – 7,883 7,698 212 – 7,910 7,747 163 7,910 – – 4,902 4,902 – 4,902 4,902 – – 4,511 4,511 116 4,395 4,511 The Group obtained a covenant reset in the year for the following covenants: The December 2015 and March 2016 quarterly covenant of the ratio of consolidated gross borrowings less consolidated total cash to consolidated EBITDA as well as the annual covenant requirement to clear down the borrowing facility to nil for ten clear days. The Company borrowings are denominated in Sterling. All intercompany borrowings are formalised by way of loan agreements. The loans can be repaid at any time, however the Company has received confirmation from its subsidiary that they will not require payment within the next twelve months. Analysis of borrowings by currency: Group 31 March 2016 Bank overdrafts Bank loan 31 March 2015 Bank overdrafts Bank loan Sterling £’000 Euro £’000 Total £’000 7,704 – 7,704 6,039 – 6,039 2 177 179 1,659 212 1,871 7,706 177 7,883 7,698 212 7,910 The other principal features of the Group’s borrowings are as follows: At 31 March 2016 the Group had a revolving credit facility of £10 million expiring August 2019 and the future interest rates on this facility are LIBOR +2.9%. The average effective interest rate on bank overdrafts approximated 3.4% (2015: 4.07%) per annum and is determined based on 2.9% (2015: 3.6%) above three-month LIBOR. Cash at bank and bank overdrafts of £7.0 million (2015: £7.2 million) are with financial institutions with a credit rating of A2 per Moody’s rating agency. Undrawn borrowing facilities At 31 March 2016, the Group had available £3 million (2015: £9.2 million) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. Included within this the European subsidiaries had available £0.2 million (2015: £2.3 million) of undrawn import credit line facilities that could be obtained with security being given against trade receivables. The Group has recently renegotiated its banking facilities for the next three-and-a-half years, conditional on the completion of an additional equity raise of £8 million, details of which can be found within note 29 post balance sheet events. 47 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 19. FINANCIAL INSTRUMENTS The Group’s policies and strategies in relation to risk and financial instruments are detailed in note 1. Group Carrying values of derivative financial instruments Forward foreign currency contracts – cash flow hedges Assets Liabilities 2016 £’000 2015 £’000 2016 £’000 2015 £’000 394 519 (12) (24) The hedged forecast transactions denominated in foreign currency are expected to occur at various dates during the next twelve months. Gains and losses recognised in reserves on forward foreign exchange contracts as of 31 March 2016 are recognised in the Statements of Comprehensive Income first in the period or periods during which the hedged forecast transaction affects the Statements of Comprehensive Income, which is within twelve months from the balance sheet date. At 31 March 2016 the gross value of forward currency contracts was as follows: US Dollar 2016 ’000 2015 ’000 11,800 21,862 The total net fair value above for forward foreign currency contracts comprises £382,000 asset (2015: £495,000 asset) of which £382,000 net asset (2015: £362,000 asset) represents an effective hedge at 31 March 2016 and therefore credited to Other Comprehensive Income in accordance with IAS 39. The balance of £nil (2015: £136,000 asset) was the ineffective 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. The Company has no derivative financial instruments. Fair values of non-derivative financial assets and liabilities For the Group and the Company, as at 31 March 2016 and 31 March 2015, 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: trade and other receivables, cash at bank and in hand, trade and other payables and current borrowings. Bank deposits attract interest within 1.0% 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. Maturity of financial liabilities Group Less than one year Between one and two years Between two and five years More than five years Group Less than one year Between one and two years Between two and five years More than five years 48 Overdraft facilities £’000 Accounts payable and accruals £’000 7,706 – – – 7,706 Overdraft facilities £’000 7,698 – – – 7,698 7,363 – – – 7,363 Accounts payable and accruals £’000 8,967 – – – 8,967 2016 Total £’000 15,246 – – – 15,246 2015 Total £’000 16,714 49 114 – 16,877 Bank loan £’000 177 – – – 177 Bank loan £’000 49 49 114 – 212 Hornby Plc Annual Report and Accounts 2016 Company More than five years (note 18) 2016 Intercompany debt £’000 2015 Intercompany debt £’000 4,902 4,395 Hierarchy of financial instruments The following tables present the Group’s assets and liabilities that are measured at fair value at 31 March 2016 and 31 March 2015. The table analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: • Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). • Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). • Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). There were no transfers or reclassifications between levels within the period. Level 2 hedging derivatives comprise forward foreign exchange contracts and have been fair valued using forward exchange rates that are quoted in an active market. The effects of discounting are generally insignificant for Level 2 derivatives. The fair value of the following financial assets and liabilities approximate their carrying amount: trade and other receivables, other current financial assets, cash and cash equivalents (excluding bank overdrafts), trade and other payables. Financial instruments Assets Trading derivatives Derivatives used for hedging Available-for-sale financial assets Total assets as at 31 March 2016 Liabilities Interest rate swap Derivatives used for hedging Total liabilities at 31 March 2016 Assets Trading derivatives Derivatives used for hedging Available-for-sale financial assets Total assets as at 31 March 2015 Liabilities Interest rate swap Derivatives used for hedging Total liabilities at 31 March 2015 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 – – – – – – – – 394 – 394 – (12) (12) – – – – – – – – 394 – 394 – (12) (12) Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 – – – – – – – – 519 – 519 – (24) (24) – – – – – – – – 519 – 519 – (24) (24) 49 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 19. FINANCIAL INSTRUMENTS continued 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 costs are 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 1.0% increase in interest rates is £83,000 (2015: £99,000) before tax. A 1% fall in interest rates gives the same but opposite effect. 1% is considered an appropriate benchmark given the minimum level of movement in the UK interest rate over recent years and expectation over the next financial year. Foreign currency sensitivity The Group is primarily exposed to fluctuations in US 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 Sterling and in accordance with IFRS 7 all other variables remaining constant. A 10% devaluation in the value of Sterling would have the opposite effect. The 10% change represents a reasonably possible change in the specified foreign exchange rates in relation to Sterling. Comprehensive income and equity sensitivity US Dollar Euro 2016 £’000 995 1,067 2,062 2015 £’000 60 845 905 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue 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. 2016 £’000 2015 £’000 Total borrowings (note 18) Less: Total cash and cash equivalents (note 14) Net debt Total equity Total capital Gearing 7,883 7,910 (677) (451) 7,206 32,136 39,342 18% 7,459 31,756 39,215 19% 50 Hornby Plc Annual Report and Accounts 2016 20. DEFERRED TAX Deferred tax is calculated in full on temporary differences under the liability method. The movement on the deferred tax account is as shown below: At 1 April Charge/(credit) to Statements of Comprehensive Income (note 5) – origination and reversal of temporary differences Exchange adjustments At 31 March Group Company 2016 £’000 2015 £’000 (1,968) (1,722) 233 (45) (298) 52 (1,780) (1,968) 2016 £’000 121 (21) – 100 2015 £’000 126 (5) – 121 Deferred tax assets have been recognised in respect of tax losses in the UK only. Other temporary differences giving rise to deferred tax assets have been recognised in the UK where 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 2015 (Credit)/charge to Statements of Comprehensive Income Transferred from deferred tax assets At 31 March 2016 At 1 April 2014 (Credit)/charge to Statements of Comprehensive Income At 31 March 2015 Accelerated capital allowances £’000 Revaluation £’000 Group Acquisition intangibles £’000 114 (14) – 100 117 (3) 114 7 (7) – – 9 (2) 7 – – 111 111 – – – Company Accelerated capital allowances £’000 Revaluation £’000 114 (14) – 100 117 (3) 114 7 (7) – – 9 (2) 7 Other £’000 10 (10) – – 10 – 10 Total £’000 131 (31) 111 211 136 (5) 131 Deferred tax assets At 1 April 2015 (Credit)/Charge to Statements of Comprehensive Income Foreign exchange Transferred to deferred tax liabilities At 31 March 2016 At 1 April 2014 (Credit)/Charge to Statements of Comprehensive Income Foreign exchange At 31 March 2015 Net deferred tax (asset)/liability At 31 March 2016 At 31 March 2015 Group Company Short-term incentive plan £’000 Acquisition intangibles £’000 – – – – – – – – – (161) 272 – (111) – (142) (19) – (161) Short-term incentive plan £’000 – – – – – – – – – Other £’000 (1,938) (8) (45) – (1,991) (1,716) (274) 52 (1,938) Total £’000 (2,099) 264 (45) (111) (1,991) (1,858) (293) 52 (2,099) (1,780) (1,968) Total £’000 121 (21) – 100 126 (5) 121 Total £’000 – – – – – – – – – 100 121 51 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 20. DEFERRED TAX continued Group Deferred tax comprises: Depreciation in excess of capital allowances Other temporary differences – UK Other temporary differences – overseas Deferred tax (asset)/liability 2016 2015 Recognised £’000 Not recognised £’000 Recognised £’000 Not recognised £’000 (1,404) (376) – (1,780) – – (2,644) (2,644) (1,054) (546) (368) (1,968) – – (934) (934) The net deferred tax asset not recognised of £2,644,000 represents the unrecognised losses in Hornby Deutschland GmbH of £141,000 (2015: £67,000) and in Hornby Italia s.r.l of £1,361,000 (2015: £867,000), Hornby España S.A. of £431,000 (2015: nil) and Hornby France S.A.S of £711,000 (2015: nil). 2016 2015 Company Deferred tax comprises: Accelerated capital allowances Other timing differences Deferred tax liability 21. SHARE CAPITAL Group and Company Allotted, issued and fully paid: Ordinary shares of 1p each At 31 March Issue or ordinary shares At 1 April Recognised £’000 Not recognised £’000 Recognised £’000 Not recognised £’000 – 100 100 – – – 7 114 121 2016 Number of shares 39,164,100 15,789,474 54,953,574 £’000 392 158 550 2015 Number of shares 39,164,100 – 39,164,100 – – – £’000 392 – 392 On 12 August 2015 the Company issued 15,789,474 ordinary 1 pence shares for 95 pence per share, totalling £15 million. At 31 March 2016 there were no options granted under the Company’s share option schemes which remained outstanding. 22. SHARE-BASED PAYMENTS Hornby Plc operates two share-based payment plans – Share Option Scheme (‘SOS’) 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 three years and must be exercised in a four or seven year exercise window. The awards issued in previous years were subject to a performance measure of Profit 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 three years ending 31 March 2008, 2009 and 2010 being equal to or greater than £32.7 million. The awards are equity settled. 52 Hornby Plc Annual Report and Accounts 2016 Activity relating to share options for the years ended 31 March 2016 and 31 March 2015 was as follows: Outstanding at 1 April Exercised Lapsed Outstanding at 31 March 2016 2015 Weighted average exercise price Weighted average exercise price Number – 201.0p 365,809 – 201.0p (215,809) – 150,000 201.0p – 201.0p 201.0p Number 150,000 – (150,000) – No options were exercised within the financial year (2015: nil). Performance Share Plan All Performance Share Plan (‘PSP’) awards outstanding at 31 March 2016 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. 40% 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 60% 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 Statements of Comprehensive Income. This charge for the Group amounts to £18,000 and the credit for the Company amounted to £47,000 in the year ended 31 March 2016 (2015: £205,000 charge for the Group amount and the charge for the Company amounted to £102,000). 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, %) 1 Assumptions for TSR component only. 2016 PSP1 2015 PSP1 68.61p Black-Scholes (Stochastic) 68.0p nil 32.4% n/a 3 0% 46.14p Black-Scholes (Stochastic) 71.0p nil 34.2% 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. 53 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 23. EMPLOYEES AND DIRECTORS Staff costs for the year: Wages and salaries Share-based payments (note 22) Social security costs Other pension costs (note 24) Redundancy and compensation for loss of office Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 8,559 18 1,090 555 788 8,444 205 1,131 414 16 834 (48) 121 107 133 855 103 110 92 – 11,010 10,210 1,147 1,160 The redundancy costs form part of the restructuring costs in the year classified as exceptional items. Average monthly number of people (including Executive Directors) employed by the Group: Group Company 2016 Number 2015 Number 2016 Number 2015 Number Operations Sales, marketing and distribution Administration Key management compensation: Salaries and short-term employee benefits Share-based payments Other pension costs Redundancy and compensation for loss of office 47 139 44 230 65 140 47 252 1 1 5 7 Group Company 2016 £’000 1,780 18 172 544 2,514 2015 £’000 1,799 205 171 – 2,175 2016 £’000 839 (48) 107 133 2 – 3 5 2015 £’000 855 103 92 – 1,031 1,050 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 benefits under money purchase pension schemes, is included in the Directors’ Report on pages 14 to 17 and forms part of these financial statements. 54 Hornby Plc Annual Report and Accounts 2016 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 International is appointed as Independent Financial Adviser 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 £555,000 (2015: £414,000) representing the actual contributions payable in the year and certain scheme administration costs. The Company pension cost for the year was £107,000 (2015: £92,000). No contributions were outstanding at the year end of 31 March 2016. 25. FINANCIAL COMMITMENTS Group At 31 March capital commitments were: Contracted for but not provided The commitments relate to the acquisition of property, plant and equipment. The Company does not have any capital commitments. 2016 £’000 2015 £’000 414 1,706 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 property, 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 2016 £’000 2015 £’000 472 1,087 259 1,818 494 536 – 1,030 The distribution arm of the business continues to be outsourced to a third party company, DS Logistics. The initial agreement with DS Logistics was for five years from August 2014 and approximate costs under the contract if it were to be terminated early are approximately £1 million a year for the remainder of the term. 55 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes to the Financial Statements continued 27. GROUP AND COMPANY CASH FLOWS FROM OPERATING ACTIVITIES Group Company (Loss)/profit before taxation Interest payable Interest receivable Amortisation of intangible assets Impairment of goodwill Impairment of investment Depreciation Impairment of tooling (Gain)/loss on disposal of property, plant and equipment Share-based payments Loss/(gain) on financial derivatives Increase in provisions (Increase)/decrease in inventories Increase in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in derivative financial instruments Cash (used in)/generated from operations 2016 £’000 (13,532) 429 (21) 723 3,990 – 3,705 1,158 (193) 18 135 191 (650) (2,351) (3,212) (22) (9,632) 2015 £’000 (184) 506 (1) 377 – – 3,749 – (5) 205 (102) 17 166 (1,883) 1,685 798 5,328 2016 £’000 (9,017) 181 (174) – – 9,543 19 – (223) (48) – – – (62) 75 – 294 2015 £’000 337 192 (174) – – – 34 – – 103 – – – (643) (43) – (194) 28. RELATED PARTY DISCLOSURES B Ahir is our Managing Director of Hornby Hobbies Asia and a Director of Hornby Hobbies Limited, a subsidiary of Hornby Plc. 28One, not to be confused with companies of a similar name, owned by B Ahir has provided ongoing support to manage product delivery for which Hornby Hobbies has paid £176,000 in relation to these services in the year. No payments remained outstanding to 28One as at 31 March 2016. Hornby Hobbies Limited continues to use these services on an ongoing basis. Additionally, in Hornby France S.A.S the Group leased its French warehouse and office from Mr and Mrs Lanter who were both general managers and statutory Directors of Hornby France S.A.S until January 2016 for approximately €10,000 a month. The Group has since terminated this lease. There were no other 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 or any of its subsidiaries was materially interested. There are no other related-party transactions. The Company received management fees from subsidiaries of £1,316,000 (2015: £1,346,000), interest of £174,000 (2015: £174,000) and dividends from subsidiaries of £nil (2015: £nil) and incurred interest of £181,000 (2015: £192,000) on intercompany borrowings. It also received a rental income of £450,000 (2015: £450,000). 56 Hornby Plc Annual Report and Accounts 2016 29. POST BALANCE SHEET EVENTS Group refinancing The announcement today of a proposed £8 million equity placing will allow us to reduce reliance on debt facilities and we have signed a new revolving credit facility of £10 million with our main UK bankers Barclays. This facility is conditional on the additional equity raise being approved by shareholders and is expected to allow sufficient headroom for trading working capital and capital expenditure needs up to December 2019. Board changes On 26 April 2016, we announced that Group Finance Director, Steve Cooke, was appointed Chief Executive. Steve joined the business in June 2015 and has been making a significant contribution as we continue to make progress with our strategy to drive the Group’s turnaround. On 26 May 2016, the Company announced that David Mulligan had been appointed Interim Group Finance Director. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc and has a successful track record of working with companies undergoing change. Sale of property, plant and equipment On 13 June 2016 the Group disposed of its building in Hornby España S.A. for a consideration of €1.3 million. 57 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Shareholders’ Information Service Hornby welcomes contact with its shareholders. If you have questions or enquiries about the Group or its products, please contact: D Mulligan Finance Director Hornby Plc 3rd Floor The Gateway Innovation Way Discovery Park Sandwich Kent CT13 9FF www.hornby.com 58 Hornby Plc Annual Report and Accounts 2016 Notes 59 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSHornby Plc Annual Report and Accounts 2016 Notes 60 Hornby Plc Annual Report and Accounts 2016 H H o o r r n n b b y y P P L L C C A A n n n n u u a a l l R R e e p p o o r r t t a a n n d d A A c c c c o o u u n n t s t s 2 2 0 0 1 1 6 6 Hornby PLC 3rd Floor The Gateway Innovation Way Discovery Park Sandwich Kent CT13 9FF www.hornby.com ANNUAL REPORT AND ACCOUNTS 2016