ch airma n`s stat ement

C H A I R M A N ’ S S TAT E M E N T
In this, my first Chairman’s statement, I am
pleased to be able to report significantly
improved performance for the year ended
31 March 2001. Turnover increased by 15%
and profit, before exceptional items, improved
63% to £2.3 million. Even after accounting
for these exceptional costs, profit before tax
was up 24% on last year at £1.5 million.
Much of the detail is contained in the
Chief Executive’s operating review. However, I
would like to highlight a number of important
performance indicators. There has been strong
sales growth across the product ranges, and in
both Export and UK independent markets for
Scalextric sets and Hornby locomotives. The
excellent performance of Scalextric USA, Inc.
(our wholly-owned USA subsidiary) gives cause
for real optimism in a market with enormous
potential. New product introductions have
attracted acclaim in both Hornby and Scalextric
ranges and the completion of our strategy to
transfer all production processes to China
continues to improve operational performance,
quality and modelling detail. This success
clearly indicates growing popularity in the
crucial market opportunity represented by
adult collectors and enthusiasts for both
product streams. These product innovations
will continue in the coming year.
Following Peter’s departure the Board
took the view that some fundamental changes
in management processes were desirable. I
was appointed non-executive Chairman and,
shortly thereafter, at the beginning of 2001, we
were successful in recruiting Frank Martin as
our Chief Executive. Frank has an outstanding
track record in markets closely related to our
own and we are indeed fortunate to have him
lead our executive team.
Your Board also took the important
decision to concentrate on two areas of activity.
Firstly to reduce the overheads within the
business and secondly, following the
conclusion of the non-productive sale/MBO
process, to enable the executive directors to
focus their energy and skills on running the
business. This has led to a number of further
changes within the Company.
Your Board has been restructured to
reflect more appropriately the size and
complexity of our business. The Plc Board
now comprises two non-executives together
with the Chief Executive and Finance Director.
A management board meets regularly in
Margate to control the day-to-day operation
of the business, and comprises the senior
executive directors.
I would like to take this opportunity to
thank all of those who recently stood down
from the main Board for their contribution to
the business, and particularly to David Robins
our legal adviser for many years and a
non-executive director since 1999 who, I
am pleased to report, will continue his
relationship with the Company in the former
capacity.
Board Restructuring
I should like to thank Peter Newey, the former
Executive Chairman, for his work in laying
the foundations for last year’s excellent
performance.
Peter left the Company in
December to pursue his many external
interests. We wish him well.
4
Property Review
Restructuring the business in this way has also
enabled us to reduce costs elsewhere. Our
London Headquarters office and showroom
have been closed and the lease is to be
disposed of. Similarly, having successfully
completed the relocation of our production to
China, our Hong Kong office was closed in
April 2001. Continuing our property review it
is hoped that the existing Margate site will be
sold for redevelopment allowing the Company
to relocate to more suitable premises. The
terms of a sale would be subject to various
planning applications being successful.
Further details will be sent to shareholders
in due course.
note that the Board is seeking the flexibility
to re-purchase up to a similar percentage in
the coming year should circumstances be
favourable.
Dividend
Similarly your Board believes that the current
trading position and prospects for the
Company enables us to announce a final
dividend of 10p per share. This brings the total
dividend for the year to 12p, an increase of 71%
over the previous year (2000 - 7p).
The final dividend will be payable on
17 August 2001 to those shareholders on the
register as at 27 July 2001.
Outlook
The past twelve months have seen major
changes at Hornby. Perhaps most notable, and
a key contributor to success, has been focus
and stability linked to the personal endeavour
of our loyal and dedicated staff. Your Board
believes that there is further opportunity to
develop our business organically, through
enhanced product innovations, the use of
new technologies, and through potential
partnership with or acquisition of similar
businesses where Hornby’s critical skill base
could improve operations.
Our task now is to build and consolidate
our success. We can look forward to an
exciting future with two really great brands.
Product Innovation
We continue to embrace emerging technology
in our product plans. A Hornby CD Rom based
programme has been successfully launched and
a PC based interactive system for Scalextric is at
an advanced stage of development. I believe
that there is great potential in these innovations
linking, as they do, computer skills with more
traditional three-dimensional hobbies and
entertainment.
Share Buy-Back
In our interim report, published in November
last year, the Board indicated its intention to
return funds to shareholders in 2001. This
was achieved in part during March when,
using the headroom for share purchase
available to the Company, we purchased 1.1
million shares in the market (13.2% of the
issued stock) at a price of 145p. You will
Neil Johnson
14 June 2001
5
C H I E F E X E C U T I V E ’ S R E P O RT
OPERATIONAL AND FINANCIAL REVIEW
Consolidated turnover for the year to 31 March
In Scalextric the Cadillac NorthStar LMP
2001 was £24.6 million an increase of 15% over
launched in January 2001 featured for the first
the previous year’s turnover of £21.5 million.
time in a Scalextric car a self-centring guide
This
result
included
the
first
full
year
blade
and
photo-etched
metal
features,
contribution from Scalextric USA, Inc. which
including pierced brake discs. Sales on both
was acquired on 31 October 1999. Scalextric
sides of the Atlantic substantially exceeded
USA, Inc. achieved sales of £2.4 million in the
expectations.
year to 31 March 2001 and was a net
The success in both Hornby railways and
contributor to Group profit in the year.
in Scalextric of our newly specified ranges gives
In addition to the growth experienced in
great confidence that the Company is now
Scalextric USA, strong sales growth was
accessing a lucrative and growing market
experienced in Scalextric sets and Hornby
amongst adult collectors.
locomotives,
to
the
Export
and
UK
At the younger end of the market, the two
Independent markets respectively.
“My First Scalextric” 1/64 scale sets launched
Substantial benefits continue to accrue
during 2000 and targeted at the 3-5 years old
from the move of manufacturing to China. The
age group proved highly successful, resulting in
increased level of detail and consequent value
increased retailer listings for the Christmas
for money that the Company’s products now
2001 season. Capitalising on this success, a
represent
range of four “Micro – Mania” 1/64 scale sets
are
resulting
in
substantially
increased sales volumes. In addition, as each
were launched in January 2001, targeting the 5-
new product development initiative comes to
7 years age group. These products have been
fruition, we are able to demonstrate further
widely listed by major retailers for the latter
improvements in quality, detail, accuracy and
part of this year.
performance.
The core 1/32 scale Scalextric category is
In Hornby railways the newly tooled
targeted at ages 8 years and above. In this
Merchant Navy class of locomotive, launched
category there are a number of exciting
in August 2000 rapidly became the best
developments aimed at confirming the position
selling Hornby locomotive for over 20 years.
of Scalextric as the brand leader in slot car
2001 sees the continuing programme of
racing both in the UK and USA.
“Super Detail” introductions together with
The Hornby and Scalextric websites
the introduction pre-Christmas of the Hornby
continue to attract hundreds of thousands of
“Hogwarts Express” train set, produced under
visitors from around the world. Developments
licence from Warner Bros. and based on the
are in hand to improve the content and
train featured in the forthcoming film “Harry
interactivity of both sites as a prelude to e-
Potter and the Philosopher’s Stone".
commerce via the sites.
6
N O T E S T O T H E F I N A N C I A L S TAT E M E N T S
CONTINUED
One of Hornby’s largest
Beatties
of
London
Limited,
customers,
went
Following the share buy-back which
into
occurred in March 2001, and as a consequence
receivership in March 2001. As the stock held
of the improved results this year, earnings per
in the Beatties stores was owned by Hornby
ordinary share before exceptional costs rose to
under an agency arrangement, no significant
18.46p (2000 - 11.31p).
loss arose in terms of bad debt. Current
There was a net cash inflow during the
indications are that Hornby’s independent
year of £1.6 million, which is after the costs of
retailers are benefiting directly from increased
the share buy-back of £1.6 million. This strong
sales as a result of the closure of the Beatties
cash flow arose primarily as a result of a
stores. In view of this and the growth in
substantial one-off reduction in stocks, in
distribution
addition to profits generated and the fact that
to
major
accounts
indicated
above, it is anticipated that the loss of sales
capital expenditure, whilst sufficient for the
via Beatties will be compensated by increases
Company’s needs, was substantially below the
through other retail channels.
depreciation charge.
Profit before tax of
£1.5 million was
Net cash at 31March 2001 was £5.2 million
24% above last year’s result of £1.2 million.
compared to £3.6 million at 31 March 2000.
However this result is stated after a number
of
exceptional
an
exciting
future
in
prospect. The move of production to China is
totalling
complete, sales are increasing, overheads have
£797,000. Adding back exceptional costs to
been reduced and there is no shortage of
the result for both years gives profit before
product development initiatives to continue to
tax of £2.3 million compared to £1.4 million
drive the business forward. It is Management’s
in the previous year. The Company continued
intention to focus on continuing to improve
to benefit from the lower overhead base
the performance of the core business, whilst
arising from the outsourcing of production,
recognising that Hornby is now building the
and margins across all areas of the business
momentum and has the wherewithal to
improved as the full benefits of Far East
become a major force in the worldwide hobby
manufacture began to flow.
industry.
and
associated
has
with
restructuring
costs
Hornby
redundancies,
Overheads for the new financial year
which started on 1 April 2001 have been
further significantly reduced by, amongst
other things, the closure of the Hong Kong
Frank Martin
office, closure of the loss-making contract
Chief Executive
printing operation and the restructuring of
the Board.
14 June 2001
7
R E P O RT O F T H E D I R E C T O R S
The directors submit their annual report together with the audited financial statements for the year
ended 31 March 2001.
PRINCIPAL ACTIVITIES AND BUSINESS REVIEW
The Company is a holding company and has two operating subsidiaries: Hornby Hobbies Limited in
the United Kingdom and Scalextric USA, Inc. in the USA.
The Group is principally engaged in the development, manufacture and distribution of model
products.
The Group’s business review and future developments are included in the Chairman’s Statement and
Chief Executive’s Report.
RESULTS AND DIVIDENDS
The results for the year ended 31 March 2001 are set out in the Consolidated Profit and Loss Account
on page 22. Turnover for the year was £24.6m against £21.5m last year. The profit on ordinary
activities after taxation for the year amounted to £1.0m (2000 - £0.8m).
An interim dividend of 2.0p (2000 - 2.0p) per ordinary share amounting to £167,146 (2000 £167,146) was paid on 26 January 2001.
The directors recommend an increased final dividend of 10.0p (2000 - 5.0p) per ordinary share
amounting to £725,732 (2000 - £417,866) payable on 17 August 2001 to those shareholders on the
register at 27 July 2001.
PURCHASE OF OWN SHARES
Permission was obtained from shareholders at the Annual General Meeting on 28 July 2000 to
purchase up to 15 per cent of the Company’s ordinary share capital in order to return surplus funds
to shareholders and enhance earnings per share. On 15 March 2001 the Company purchased
1,100,000 ordinary shares at a nominal value of 5p, for a total consideration of £1,595,000. This
represented 13.2 per cent of the ordinary shares in issue.
The total number of options to subscribe for shares that have not yet been exercised as at 14 June
2001 is 830,000. The proportion of the Company’s issued share capital such options represent at
such date is 11.4 per cent. If the full authority to buy back the shares (existing authority and the
authority being sought) is fully utilised, the proportion of the issued share capital represented by
such options will be 13.7 per cent.
RESEARCH & DEVELOPMENT
The Board considers that research and development into new products continues to play an
important role in the Group’s success.
All costs incurred are charged to the Profit and Loss Account as set out in note 3.
PROPERTY VALUES
In the opinion of the directors, and given current planning use approvals, there is no
significant difference between the book value and the current market value of interests in land
and buildings.
CHARITABLE DONATIONS
During the year the Group made donations of £140 (2000 - £135) for charitable purposes.
8
DIRECTORS
The persons who were directors during the year are listed below:
Mr N A Johnson, aged 52, was originally appointed a non-executive director on 1 July 1998.
On 22 December 2000 Mr Johnson assumed the responsibilities of Non-Executive Chairman.
Mr Johnson is currently Chairman of CybIT PLC and a non-executive director of Charter Plc
and Tenon Group Plc and was previously Chief Executive Officer of RAC Holdings Limited and
an executive director of Jaguar Cars Limited.
Mr F Martin, aged 49, was appointed Chief Executive on 3 January 2001. Mr Martin was
previously Chief Executive of Humbrol Limited, and formerly Managing Director of Denby
Pottery Limited and Group Marketing Director of Hasbro (UK) Limited. Having been appointed
during the year, Mr Martin retires and offers himself for re-election at the forthcoming Annual
General Meeting. Mr Martin's conditions of employment include, to be effective from 2 July 2001,
a notice period of one year to be given by the Company and of six months to be given by
Mr Martin.
Mr J W Stansfield, aged 46, has been employed by the Group since April 1982. He was appointed
Finance Director and Company Secretary on 4 December 1996. Mr Stansfield retires by rotation
under article 97 of the Articles of Association and offers himself for re-election at the forthcoming
Annual General Meeting. Mr Stansfield’s conditions of employment include a notice period of one
year to be given by the Company and of six months to be given by Mr Stansfield.
Mr N J Cosh, aged 54, was appointed a non-executive director on 21 June 1999. He is Chairman of
The Fleming Investment Trust plc and a non-executive director of Bradford & Bingley plc, GarbanIntercapital plc and other companies. He was previously finance director of J.I.B. Group plc, M.A.I.
plc and Gill & Duffus Group plc.
Mr N B Cole, aged 46, resigned as a director of the Company on 14 May 2001 but will continue as a
director of the Company’s operating subsidiary, Hornby Hobbies Limited.
Mr F Passet, a ged 49, resigned as a director of the Company on 14 May 2001 but will continue as a
director of the Company’s operating subsidiary, Hornby Hobbies Limited.
Mr P Newey resigned as a director and left the Company on 22 December 2000.
Mr T P Nabbs, resigned as a director and left the Company on 14 May 2001.
Mr D A Robins, aged 48, resigned as a non-executive director on 14 May 2001. He is a partner in
City law firm Berwin Leighton Paisner and will continue to provide legal advice to the Company.
The interests of the directors in the shares of the Company and in options granted over such shares
are disclosed in the Remuneration Report on pages 17 to 20.
SUBSTANTIAL SHAREHOLDINGS
The Company has been notified that on 1 June 2001 the following parties were interested in 3 per
cent or more of the Company’s ordinary share capital.
Shareholder
Toscafield Limited
P J Wood Associates Limited
Electra Investment Trust PLC
Stevenson Engineering Company
Tudor Capital UK Limited
J J Hosking
Marathon Asset Management Limited
9
Number of
Ordinary Shares
Percentage
held
2,398,094
865,000
819,030
630,000
400,000
302,840
240,000
33.04
11.92
11.29
8.68
5.51
4.17
3.31
R E P O RT O F T H E D I R E C T O R S
CONTINUED
FINANCIAL INSTRUMENTS
The Group’s financial instruments, other than derivatives, comprise borrowings, some cash and
liquid resources, and various items, such as trade debtors, trade creditors, etc. that arise directly from
its operations. The Group’s financial liabilities comprise borrowings, trade creditors, other creditors
and finance leases, the main purpose of which is to raise finance for the Group’s operations. The
Group also has financial assets comprising cash, trade and other debtors.
The Group also enters into derivatives transactions (principally forward foreign currency contracts).
The purpose of such transactions is to manage the currency risks arising from the Group’s operations.
It is, and has been throughout the period under review, the Group’s policy that no trading in
financial instruments shall be undertaken.
The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk and
foreign currency risk. The Board reviews and agrees policies for managing each of these risks and
they are summarised below. These policies have remained unchanged since 1 April 2000.
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 had no borrowings other than finance leases.
Liquidity risk
The Group only requires borrowings at certain times of the year. The short term flexibility required
is achieved by overdraft facilities.
Foreign currency risk
The Group purchases a significant proportion of its products from the Far East in US and HK dollars.
The Group’s policy is to reduce currency exposure arising from its purchases and anticipated orders
by using forward foreign exchange contracts of up to 6 months. All sales and other purchases
originating in the UK are denominated in sterling.
The Company has a US subsidiary. At present the Company does not consider the balance sheet
translation exposure significant enough to warrant matching the net currency assets with currency
borrowings.
EUROPEAN MONETARY UNION (EMU)
The directors are aware of the implications of the European Monetary Union both for the Company's
information systems and other aspects of its operations. The Company's computer systems will
accommodate multi-currency transactions and euro-denominated trading.
ANNUAL GENERAL MEETING - SPECIAL BUSINESS RESOLUTIONS
The notice of Annual General Meeting set out on pages 44 and 45 includes special resolutions to
renew the directors' authority to allot equity securities and the Company's authority to purchase its
own shares.
Resolution Number 5 is a special resolution which would give the Board authority within the
meaning of Section 80 of the Companies Act 1985 to allot equity securities of the Company up to an
aggregate nominal value of £162,500. If approved, the resolution will entitle the Board to allot
equity securities having an aggregate nominal value of £18,000 for cash, equivalent to 360,000
ordinary shares representing 5.0 per cent of the Company's issued share capital as at 31 March 2001,
10
as if Section 89(1) of the Act conferring pre-emption rights on shareholders did not apply.
Allotments for cash in excess of this figure on a non pre-emptive basis will require prior shareholder
approval except in the case of a rights issue to existing shareholders. This Section 80 authority and
Section 89 disapplication will last until the end of the next Annual General Meeting of the Company.
Resolution Number 6 is a special resolution which would give the Board authority under
Section 166 of the Companies Act 1985 to make one or more market purchases (within the
meaning of Section 163(3) of that Act) of its own shares up to a maximum representing 15 per
cent of the issued ordinary share capital of the Company at the date of this resolution. The
directors will exercise this power only if they believe that the effect of such purchases will be to
increase earnings per share and that to do so is in the best interests of the Company and
shareholders generally. The minimum price which may be paid for an ordinary share is the par
value of such share, from time to time, exclusive of expenses. The maximum price which may be
paid for an ordinary share shall be an amount equal to 5 per cent above the average of the middlemarket quotations for the ordinary shares as derived from the London Stock Exchange Daily
Official List for the five dealing days immediately preceding the day on which the purchase is
made, exclusive of expenses. The authority to make market purchases will also last until the end
of the next Annual General Meeting of the Company.
PERSONNEL POLICIES
It is the policy of the Group to follow equal opportunity employment practices and these include
the full consideration of employment prospects for the disabled.
Applications for employment by disabled persons are always fully considered, bearing in mind the
aptitudes of the applicant concerned. It is the policy of the Group that the training, career
development and promotion of disabled persons should, as far as possible, be identical with that of
other employees.
Arrangements are made, wherever possible, for retraining employees who
become disabled, to enable them to perform work identified as appropriate to their aptitudes.
The Group places importance on the contributions to be made by all employees to the progress of
the Group and aims to keep them informed by the use of formal and informal meetings.
CREDITOR PAYMENT POLICY
Hornby has agreed a variety of payment terms with its suppliers. It is and will remain the general
policy of the Group and Company that payments to a supplier are made in accordance with the
general conditions of purchase agreed with that supplier, providing the supplier complies with all
relevant terms and conditions and also that the invoice is presented in a timely fashion.
The average creditor payment period for the main trading subsidiary at 31 March 2001 was 32 days.
The Company itself does not trade and therefore has no external creditors.
AUDITORS
A resolution to re-appoint the auditors, PricewaterhouseCoopers, will be proposed at the
forthcoming Annual General Meeting.
By order of the Board
J W Stansfield
Secretary
Westwood
Margate
Kent CT9 4JX
14 June 2001
11