11th Jul 2007 11:45
Air Music & Media Group PLC11 July 2007 11 July 2007 AIR MUSIC & MEDIA GROUP PLC ("AIR GROUP" or "THE GROUP") FINAL RESULTS FOR THE TWELVE MONTH PERIOD ENDED 31 MARCH 2007 The Board of Air Group, the UK distributor of home entertainment products,announces Final Results for the year ended 31 March 2007 that, despite reducedturnover, continues to reflect significant underlying profitability throughoutthe Group. HIGHLIGHTS: • Turnover of £64.6 million (2006: £72.3 million); • Adjusted PBT of £4.7 million (2006: £4.8 million); • £5.7 million of borrowings repaid and the net borrowings position eliminated (2006: net borrowings £6.4 million); • Music Box Leisure delivered £48.5 million external sales (2006: £47.2 million) and renewed its sole supply agreements with Co-op and Moto outlets; • Legacy Entertainment sold in June 2007 for cash consideration of C$500,000 (£232,000); and • Air Music & Media Sales absorbed into ESD Wholesale and overheads in this business reduced. Peter Cowgill, Non-Executive Chairman of Air Group, said: "In assessing thestrategic options for Air Group, the Board has concentrated on managing thesuccessful income generating business units while exiting the poorer performingaspects of the Group. Air Group is now firmly positioned as a business that issubstantially that of the distribution business acquired in November 2004 andconsists of two main trading companies, Music Box Leisure Limited and ESDWholesale Limited. Accordingly, the transparency and key focus of the Group isnow significantly improved." Trevor Allan, Chief Executive of Air Group, commented: "We have nowsignificantly completed the simplification of the Group's operations. We are adistributor of home entertainment products providing added value to a broadspectrum of retailers. Our buying strategy requires us to maintain a high stocklevel, although this is spread across a broad range of titles. We achieve thegreatest profits through the added value we provide to the non traditionalsector. The Group is now much more efficiently structured to increase its focusin key performance areas to effectively compete in the challenging market place." Enquiries: Air Music & Media Group plc Tel: 01772 455 000Peter Cowgill, Non-Executive ChairmanAlex Sorrell, Finance Director Bishopsgate Communications Ltd. Tel: 020 7562 3350Dominic Barretto Mobile: 07930 450 156Fran Read Mobile: 07952 356 889 Seymour Pierce Limited Tel: 020 7107 8000Mark Percy CHAIRMAN'S STATEMENT I have pleasure in reporting on the first full set of results since myappointment in July 2006. Following my appointment, the Board established thatthe potential for growth and sustained profitability existed within the core UKdistribution businesses and accordingly set about divesting ourselves of theunprofitable and underperforming business units. Strategic actions In assessing the strategic options for the Air Group the Board has concentratedon managing the successful income generating business units while exiting thepoorer performing aspects of the Group. The Board recently announced the saleof Legacy Entertainment Inc. ("Legacy") which completed this strategy. Weclosed down Play Media Limited ("Play Media"), our pilot retail operation inSeptember 2006. We have also recently absorbed the activity of Air Music andMedia Sales Limited ("AMM Sales") into our wholesale business, ESD WholesaleLimited ("ESD"), bringing a small sales team across to retain the minorityelement of profitable business. Air Group is now firmly positioned as abusiness that is substantially that of the distribution business acquired inNovember 2004 and consists of two main trading companies, Music Box LeisureLimited ("MBL") and ESD. Accordingly, the transparency and key focus of theGroup is now significantly improved. Results The strategic actions have resulted in a number of exceptional and non-recurringcharges in the year which are more clearly analysed in the table below: 31/03/2007 31/03/2007 31/03/2007 31/03/2006 £ million £ million £ million £ million Continuing Discontinued activities activities Total Total Turnover 61.5 3.1 64.6 72.3 Reported operating profit 0.3 (1.5) (1.2) 1.6 Adjustments:Goodwill amortisation 1.8 - 1.8 1.8Goodwill impairment charge 2.0 0.6 2.6 -Accelerated amortisation of other intangible assets 1.7 - 1.7 -Exceptional item - mechanical royalties for Legacy - (0.1) (0.1) 0.4Additional asset provisions in Legacy - 0.3 0.3 -Other exceptional items in the previous year - - - 1.7 Adjusted operating profit 5.8 (0.7) 5.1 5.5 Interest (0.4) - (0.4) (0.7) Reported (loss)/profit before tax (0.1) (1.5) (1.6) 0.9 Adjusted profit/(loss) before tax 5.4 (0.7) 4.7 4.8 The results show that, despite reduced turnover, the Group continued to achievesignificant underlying profitability with adjusted profits of £4.7 million. Exceptional items and non recurring charges The Board has formed the opinion that there is minimal recoverable value fromthe historic Air Music and Media Sales business (which included the previousacquisitions of The Original Record Company Limited and Maximum EntertainmentLimited). Accordingly an impairment provision of £2.0 million equal to theremaining goodwill on acquisition was charged in the period. A furtherimpairment provision was also established equal to the remaining goodwillarising from the original acquisition of Legacy totalling £0.6 million. The Group holds various music copyrights for exploitation. Sales of the Group'sowned copyright material have declined significantly during the year and theprospect for an improvement is remote. The copyrights are capitalised asintangible assets and amortised over a period of up to twenty years howeverduring the period the Board concluded that their useful life had beenextinguished. In consequence, accelerated amortisation of £1.7 million has beencharged to profit in the period. Last year the Board reported a claim for underpaid mechanical copyrightroyalties brought by the Harry Fox Agency ("HFA") against Legacy. Althoughthere was considerable uncertainty over its validity, the Group provided for asubstantial element of the claim (£0.6 million). Whilst the claim has not beenformally settled, there is a revised settlement figure proposed by HFA and thecarrying value of the provision has been adjusted accordingly to £0.4 million.For consistency, the release of provision in the current year has been shownalongside the charge for last year in the table above. Legacy was sold on 15 June 2007 for cash consideration of C$500,000 (£232,000)payable by instalments over nine months. In addition, the Group entered into alicense agreement with Legacy which may result in an income due to the Groupbased upon Legacy's future sales performance. No element of the license incomehas been recognised in these financial statements therefore, to reflect theshortfall of consideration compared to the net assets of Legacy, additionalasset provisions of £0.3 million have been established. Taxation There are two significant factors affecting the tax charge, namely goodwillamortisation and an indemnity the Group has provided for tax liabilities relatedto Legacy. Firstly, the amortisation and impairment of goodwill arising onacquisition of £4.4 million (2006: £1.8 million) does not attract tax relief.Secondly, the Group has indemnified the purchasers of Legacy for potential taxliabilities relating to ongoing investigations by the Canadian tax authoritiesfor the periods 2002 to 2005. A provision for the maximum estimated taxliability of £0.5 million has been charged in the results to 31 March 2007. Thefinal tax liability will only be determined after agreement has been reachedwith the Canadian tax authorities. Debt and working capital Substantially all the exceptional items and non recurring charges in the currentyear are "non-cash" items. As a result of the underlying profits, therefore,there continues to be strong cash generation from the core business. The Grouphas accelerated its repayment schedule and repaid £5.7 million of net debt inthe year. Peter CowgillNon-Executive Chairman 11 July 2007 OPERATING REVIEW We are a group that has, at its core, a home entertainment products distributionbusiness servicing customers in the UK. We position our product offering toappeal to impulse buyers. The following presents a review of the performance ofthe different businesses in the Group. The key performance indices we use tomeasure the business are sales and margins. Continuing operations: Music Box Leisure ("MBL") MBL is central to the Group. MBL's customers are exclusively in what theindustry terms the "non traditional" sector, for example supermarkets, discountretailers and garden centres, rather than conventional high street CD and DVDshops. The emphasis with customers is about delivering strong sales and marginsthrough targeted promotions. MBL has its own in-house merchandising team whichallows it to directly manage the quality of its customers' in-store operations.It combines its customers' sales data with strong buying skills to deliver goodretail margins. MBL delivered £48.5 million external sales during the year andrenewed its sole supply agreements with Co-op and Moto outlets. ESD Wholesale ("ESD") ESD is a wholesaler primarily to independent and internet retailers. Theindependent retail sector has had a difficult time this year, epitomised by thecollapses of Silverscreen in April 2006 and Music Zone in December 2006. As aresult of the uncertainty surrounding the traditional retail sector creditinsurers have become extremely cautious and have reduced insurance cover. Weoperate on a low risk basis and seek to trade within insured limits.Accordingly we have refused certain sales opportunities in the year. Overallsales in ESD declined from £14.4 million to £10.5 million. However, we focussedon increasing the DVD share of revenue and margin improvement and have increasedgross margins to over 13% from 8.3% in the previous year. Air Music and Media Sales ("AMM Sales") AMM Sales continued to export budget CD's, albeit to a smaller customer base.The budget CD market continued its decline, under pressure from falling pricesof premium products. Sales fell to £2.5 million from £4.5 million in theprevious year. We have worked to eliminate all but essential overhead in thisbusiness and recently absorbed the remaining business into ESD. We are also nowbetter placed to offer to our export customer base the full range of productswhich the Group distributes. Discontinued operations: Legacy Entertainment Inc ("Legacy") The performance at Legacy was disappointing in the year, with sales fallingsignificantly. Results over the critical Christmas trading period reflected adeteriorating position which led the Board to commission an independentassessment of strategic options. Following the results of the assessment, theBoard concluded that the best value for the Group would be achieved through anorderly sale process. That sale process was concluded in June 2007 and Legacywas sold for cash consideration of Can$500,000 (£232,000), payable byinstalments over nine months. The Group has indemnified the purchasers forpotential tax liabilities relating to ongoing investigations for the periods2002 to 2005. The Group has also entered into a license agreement with Legacywhich may result in an income due to the Group based upon Legacy's future salesperformance. Sales for the year to 31 March 2007 were £2.5 million compared to£4.6 million in the previous year. Legacy made a loss before tax andexceptional items of £0.1 million for the year to 31 March 2007 compared to aprofit of £0.7 million in the previous year. Play Media We experienced first hand the problems facing small groups of specialistretailers and decided to liquidate the business in September 2006 when it wasclear that there was no long term future for the operation. Sales to the dateof liquidation were £0.6 million and Play Media made a loss before tax of £0.3million. Strategy and Risks The Group's customer base is heavily weighted in the UK supermarket sector,which accounts for over 60% of group turnover. Our customers are retailers forwhom profit margins, as a whole, are continually under pressure and thispressure is in turn placed on the suppliers. We use our buying skills to seekout profitable opportunities to mitigate the pressure on margins. The pervasive effects of the internet inevitably present risks and offeropportunities to the Group. We focus on mainstream product, not new chartreleases, and as such do not feel the effects of internet downloading as acutelyas other distributors. We are developing ways in which we can benefit fromdistributing our products on line, which have included selling via establishedthird party websites. We have now significantly completed the simplification of the Group'soperations. We are a distributor of home entertainment products providing addedvalue to a broad spectrum of retailers. Our buying strategy requires us tomaintain a high stock level, although this is spread across a broad range oftitles. We achieve the greatest profits through the added value we provide tothe non traditional sector. The Group is now much more efficiently structuredto increase its focus in key performance areas to effectively compete in thechallenging market place. Trevor AllanChief Executive 11 July 2007 FINANCIAL REVIEW Turnover and margins Turnover for the year was £64.6 million compared to £72.3 million last year. Asshown below, although MBL demonstrated modest growth there were declines at bothESD and AMM Sales as explained in the operating review. Turnover (£ million) 31/03/2007 31/03/2006 Change Music Box Leisure 48.5 47.2 2.8%ESD Wholesale 10.5 14.4 (27.1)%Air Music and Media Sales 2.5 4.5 (44.4)%Discontinued activities 3.1 6.2 (50.0)% 64.6 72.3 (10.7)% Reported gross margins for the Group, excluding the accelerated amortisation ofcatalogue rights, increased to 21.5% (2006: 19.7% before exceptional items).Excluding intercompany trading, gross margins at MBL increased to 23.2% (2006:21.6%) and gross margins at ESD increased to 13.4% (2006: 8.3%). Adjusted profitability As described in the Chairman's statement the Group accelerated the amortisationof its music catalogue rights, incurring a one-off accelerated amortisationcharge of £1.7 million. Group operating profit from continuing businesses,after adjusting for the accelerated amortisation in the current year andexceptional items in the previous year, excluding goodwill amortisation, was£5.8 million (2006: £5.5 million). Adjusted operating profit margin was 9.4%(2006: 7.6%). The increase in profit margin reflects the gross marginimprovements across MBL and ESD. Borrowings During the year the Group repaid £5.7 million of borrowings and eliminated thenet borrowings position (2006: net borrowings £6.4 million). Our facilities consist of £2.0 million term loans, £3.0 million revolving credit(nil utilised at 31 March 2007), £0.8 million of vendor loan notes and a salesfinancing facility linked to the trade debtors position of MBL. The vendor loannotes were repaid in April 2007. Alex SorrellFinance Director 11 July 2007 Consolidated Profit and Loss AccountFor the year ended 31 March 2007 Continuing Discontinued Total Total operations operations 2007 2007 2007 2006 £'000 £'000 £'000 £'000 Group turnover 61,508 3,085 64,593 72,287 Cost of sales (49,974) (2,271) (52,245) (58,431) Gross profit 11,534 814 12,348 13,856 Distribution costs (1,467) (97) (1,564) (1,653)Administrative (9,753) (2,180) (11,933) (10,572)costs Group operating (loss)/profit 314 (1,463) (1,149) 1,631 Interest, net (409) (698) (Loss)/profit on ordinary activities before taxation (1,558) 933 Taxation (1,486) (1,064) Loss on ordinary activities after (3,044) (131)taxation Basic and diluted loss per share (17.7)p (0.8)p Statement of Group Total Recognised Gains and LossesFor the year ended 31 March 2007 Total Total 2007 2006 £'000 £'000 Loss for the financial year (3,044) (131)Dividends paid - (60)Exchange adjustments offset in reserves (34) 56Total recognised losses for the year (3,070) (135) Consolidated Balance SheetAs at 31 March 2007 2007 2006 £'000 £'000 Fixed AssetsIntangible assets 27,833 34,142Tangible assets 388 591 28,221 34,733Current AssetsStocks 6,855 7,965Debtors 7,490 11,136Cash at bank and in hand 2,862 2,205 17,207 21,306Creditors : Amounts falling due (14,390) (19,818)within one yearNet Current Assets 2,817 1,488Total Assets Less Current Liabilities 31,038 36,221 Creditors : Amounts falling due (147) (2,034)after more than one yearProvisions for liabilities and (417) (643)charges Net Assets 30,474 33,544 Capital and Reserves Called up share capital - equity 12,872 12,673interestsShares to be - 206issuedShare premium 21,454 21,447Profit and loss account (1,052) 2,018Merger reserve (2,800) (2,800)Shareholders' Funds 30,474 33,544 Consolidated Cash Flow StatementFor the year ended 31 March 2007 2007 2006 £'000 £'000 £'000 £'000 Net cash inflow from operating activities (Note 1) 8,461 5,099 Returns on investments and servicing offinanceInterest 69 64receivedInterest paid (450) (762) Net cash outflow from returns on investments (381) (698)and servicing of finance Taxation Corporation tax paid (1,349) (2,046) Capital expenditure and financial investmentPayments to acquire tangible fixed assets (274) (197)Receipts from sale of tangible fixed assets 29 68Payments to acquire intangible fixed assets (1) (25) Net cash outflow from capital expenditure andfinancial investment (246) (154) Acquisitions and disposalsPurchase of subsidiary undertaking - (108)Net (overdraft)/cash acquired with - (143)subsidiaryDeferred consideration paid for subsidiary - (623)Disposal of subsidiary (36) - Net cash outflow from acquisitions and disposals (36) (874) Equity dividends paid to shareholders - (60) Cash inflow before financing 6,449 1,267 FinancingRepayments of long term debt (2,744) (1,997)Repayments of short term debt (3,000) -Hire purchase repayments (11) (64) Net cash outflow from financing (5,755) (2,061)Increase/(Decrease) in cash in the year 694 (794) Notes to the Consolidated Cash Flow StatementFor the year ended 31 March 2007 1 Reconciliation of operating profit 2007 2006 to net cash inflow from operating £'000 £'000 activities Operating profit (1,149) 1,631 Depreciation 193 454 Amortisation and impairment of 6,309 2,254 intangible assets Loss/(Profit) on disposal of 248 17 tangible assets Decrease/(Increase) in stock 1,110 (276) Decrease/(Increase) in debtors 3,765 (10) (Decrease)/Increase in creditors and (2,051) 1,040 provisions Net effect of foreign exchange 36 (11) differences Net cash inflow from operating 8,461 5,099 activities 2 Analysis of net debt At Cash Non Cash Exchange 1.4.2006 Movement Movement Movement At 31.3.2007 £'000 £'000 £'000 £'000 £'000 Cash in hand, at bank 2,205 694 - (37) 2,862 2,205 694 - (37) 2,862 Debt due within one (6,570) 3,854 - - (2,716) year Debt due after one year (2,034) 1,890 - - (144) Obligations under hire purchase (1) 11 (15) 1 (4) (8,605) 5,755 (15) 1 (2,864) Total (6,400) 6,449 (15) (36) (2) 3 Reconciliation of cash flow to movement in net 2007 2006 debt £'000 £'000 (Decrease)/Increase in cash in the 694 (794) year Change in net debt resulting from cash 5,755 2,061 flows Change in net debt resulting from exchange (36) 45 differences Change in net debt resulting from (15) - non cash items Net debt at beginning of the year (6,400) (7,712) Net debt at the end of the year (2) (6,400) Notes to the Financial StatementsFor the year ended 31 March 2007 1. Source of Information The preliminary financial statements for the financial year ended 31 March 2007were approved by the Board of Directors on 11 July 2007. The financialinformation set out above does not constitute the Company's statutory accountsfor the financial years ended 31 March 2006 or 31 March 2007 but is derived fromthose accounts. Statutory accounts for the financial year ended 31 March 2006have been delivered to the Registrar of Companies. The auditors have reportedon those accounts; their reports were unqualified and did not contain statementsunder section 237(2) or (3) of the Companies Act 1985. The statutory accountsfor the financial year ended 31 March 2007 will be delivered to the Registrar ofCompanies following the Company's Annual General Meeting. We anticipate thatthe auditor's report in relation to the 2007 statutory accounts will be (i)unqualified and (ii) will not contain statements under section 237(2) or (3) ofthe Companies Act 1985. 2. Exceptional items The following items are exceptional in nature and have been charged againstoperating profit: 2007 2006 £'000 £'000 Included within cost of sales:a. Provision for mechanical royalty payments in Canada - discontinued (158) 446 operations Included within administrative expenses:b. Impairment of goodwill - continuing operations 2,018 -b. Impairment of goodwill - discontinued operations 618 -c. Accelerated amortisation of other intangible assets - continuing 1,670 - operationsd. Asset provisions in Legacy Entertainment Inc. - discontinued operations 312 -e. Strategic review - 1,428f. Litigation with former vendors of Hollywood DVD Limited - 258 4,618 1,686 a. In June 2006 the Group was notified of the results of a mechanicalroyalties audit undertaken in North America by the Harry Fox Agency ("HFA").The audit spanned the 10 year period October 1995 to September 2005. HFAclaimed that mechanical royalty payments to HFA had been understated by US$1.1million during the period. Although there was considerable uncertainty as tothe validity and amount of the understatement the Directors considered itappropriate to provide for a substantial element of the claim, that element ofthe claim that may relate to previous periods was reported as an exceptionalitem of £446,000 (US$860,000). In 2007 HFA indicated it would settle for alower amount than claimed, accordingly £158,000 was released to profit. b. As part of the strategic actions taken by the Board in the year,the activities of Air Music and Media Sales were significantly streamlined andthen absorbed into ESD Wholesale after the end of the year. Air Music and MediaSales included the activities of former acquisitions The Original Record Companyand Maximum Entertainment. Following an assessment of anticipated futureperformance, the Board concluded that the remaining goodwill associated with theAir Music and Media Sales business was significantly impaired. As aconsequence, the amortisation of the goodwill was accelerated resulting in afull write off of the remaining goodwill at 31 March 2007 - this charge is acomponent of continuing operations. In addition, following a similar assessmentat Legacy Entertainment Inc. the Board concluded that the remaining goodwill onacquisition of that business was also significantly impaired and accelerated theamortisation resulting in a full write off of the remaining goodwill at 31 March2007 - this charge being reflected as a component of discontinued operations.Legacy Entertainment was sold in June 2007 at an amount equivalent to the netbook value of its written down assets. Notes to the Financial Statements For the year ended 31 March 2007 (continued) c. A substantial part of the businesses of Air Music and Media Salesand Legacy Entertainment was the exploitation of copyrights owned or controlledby the Group. Due to a sustained underperformance at both of those businessesas a consequence of the pressure on the budget cd market, the Board reviewed therecoverable value of the copyrights owned by the Group and capitalised asintangible assets. The copyrights were being amortised over a period of up to20 years, the Board assessed that the remaining period was excessive given thestrategic direction of the group. The Board directed that the amortisation ofthe remaining balance of copyright costs should be accelerated resulting in afull write off of the remaining balance at 31 March 2007 d. Legacy Entertainment was sold shortly after the year end. The netassets of Legacy were written down to the estimated recoverable value (being theanticipated sales proceeds). e. In the previous year the Board announced that it was undertaking astrategic review of the Group's operations. This involved the placing intoAdministration of Hollywood DVD, the rationalisation of the Board structure andthe centralisation and relocation of corporate, finance, IT and distributionfunctions to Leyland. The costs of these actions were reflected as exceptionalitems in 2006. f. In the previous year the Group was involved in litigation withformer vendors of Hollywood DVD in relation to the acquisition of thatsubsidiary and these costs were reflected as exceptional items in 2006. 3. Earnings Per Share In accordance with FRS22, the basic earnings per share has been calculated onthe loss after tax of £3,044,000 (2006: £131,000 loss) and the weighted averagenumber of ordinary shares in issue during the year of 17,162,735 75p shares(2006: 15,670,150 75p shares). Adjusted earnings per share, as disclosed below, are calculated using the profit/loss after tax for the financial year having added back exceptional items(after adjusting for the effect of tax) and goodwill amortisation and impairmentover the basic and diluted weighted average shares in issue during the year. 2007 2006 £'000 £'000Loss after taxation (3,044) (131)Exceptional items - 2,132Accelerated intangible 1,670 -amortisationGoodwill amortisation and 3,770 1,740impairmentTaxation provision for Legacy 503 -Taxation on exceptionals (501) (518)Profit for normalised calculation 2,398 3,223Loss from discontinued 1,463operationsProfit attributable to shareholders from 3,861continuing operations Basic (loss) per share (17.7) p (0.8) pLoss per share from discontinued operations 8.5 pBasic (loss)/earnings per share from (9.2) pcontinuing operations Notes to the Financial StatementsFor the year ended 31 March 2007 (continued) 2007 2006 Basic adjusted earnings per share 14.0 p 20.6 pLoss per share from discontinued operations 8.5 pBasic adjusted earnings per share from 22.5 pcontinuing operations 4. Annual report The Annual Report will be posted to shareholders in late August. Copies of theAnnual Report will be available from the Air Music and Media Group plc, Unit 9Enterprise Court, Lancashire Enterprise Business Park, Centurion Way, Leyland,PR26 6TZ. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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