Final Results

RNS Number : 9021M

Journey Group PLC

02 June 2010

 

2 June 2009

 

Journey Group plc

Annual Results

for the year ended 31 December 2009

 

 

Journey Group plc ("Journey Group" or the "Group") a leading provider of in-flight products, catering and media services to the airline and travel industry today announces its results for the year ended 31 December 2009.

 

Highlights

 

·; Financial

- EBITDA before non-recurring items, provision write-back and exchange differences £1.2m (2008 - £0.6m).

- Loss before tax £4.7m (2008 - £10.5m)

- Net debt £0.5m (2008 - £5.7m)

 

·; Operational

- Completion of the in-flight catering joint venture at London Heathrow creating the second largest in-flight caterer at Heathrow

- Substantial completion of the restructuring in the Products Division delivering redefined business model and considerable cost savings

- Successful first full year of operations at the Los Angeles facility delivering EBITDA of £0.9m

 

Stephen Yapp, Chairman commented "During the first quarter of 2010 the Group has performed in line with expectations. In the Products Division and Media on the Move Limited the Group has two businesses that are poised to benefit from recovery over the next two years. Growth is expected in the Los Angeles Division in the current year and exciting potential opportunities exist to expand into other US cities. Accordingly, whilst recovery in the Group's markets is only just beginning and the global economic recovery still tentative, we are increasingly confident of the Group's future success".

 

For further information please contact:

 

Stephen Yapp

Journey Group plc

Tel: +44 (0) 20 8606 2000

[email protected]

 

Carl Fry

Journey Group plc

Tel: +44 (0) 20 8606 2000

[email protected]

 

KBC Peel Hunt Ltd (Nominated Advisor & Broker)

David Anderson / Daniel Harris

Tel: +44 (0) 20 7418 8900

 

EXECUTIVE CHAIRMAN'S LETTER TO SHAREHOLDERS

 

Dear Shareholder,

 

INTRODUCTION

 

Your Group has continued to build the foundations for creating significant future shareholder value despite an exceptionally difficult year for the airline industry.

 

I reported in my interim report that growth opportunities had been created and the Group's businesses had been re-positioned with an attractive and competitive product range and service offering together with a lean cost structure. This process has taken a number of significant steps forward during the second half year, including:

 

·; Completion of the in-flight catering joint venture at London Heathrow with Alpha Flight UK Limited, part of Autogrill S.p.A.

 

·; Further significant progress leading to the substantial completion of the restructuring in the Products Division.

 

·; A successful first full year of operations at the Los Angeles facility.

 

For the international airline industry, which is the Group's principal marketplace, 2009 was one of the most difficult on record. Airlines collectively incurred substantial losses and are expected to suffer further high levels of losses during the current year. Mergers between airlines have been announced recently, including two involving British Airways and United Airlines, who are both important customers to the Group. Further corporate activity is expected, including strategic alliances between airlines, as the industry strives to tackle its deficit and emerge profitably. This uncertain and challenging environment has impacted the Group during the year with continued pricing pressure and reduced volumes due to lower passenger and flight numbers. Nevertheless, the Group has responded well both operationally and strategically. With the still tentative nature of the global economic recovery I expect conditions to remain difficult into 2011. The Board has driven significant strategic change over the last year and in navigating our future direction we shall always be responsive to the need for further change.

 

ALPHA-AIRFAYRE LIMITED JOINT VENTURE

 

At the interim stage I reported that the Group had entered into a letter of intent with Alpha Flight UK Limited for the purpose of creating an in-flight catering joint venture at London Heathrow. On 20 November 2009, the Group announced the completion of the joint venture, which substantially enhanced the competitive position of the combined business and positioned it as the second largest in-flight caterer at Heathrow. Whilst adding value to the Group's portfolio, £5.0 million of cash was also released enabling the Group to improve its working capital position and reduce borrowings. During the first months of operation the joint venture has begun to deliver on its key operational improvements.

 

 

RESULTS

 

The results for the year were as follows:

 

Year to 31 December	2009 £'m	2008 £'m
Revenue	74.5	91.3
EBITDA before non-recurring income, provision write-back and exchange differences	1.2	0.6
Non-recurring income	-	0.9
Provision write-back	-	0.3
Exchange differences	-	0.5
EBITDA before exceptional items and share based payments	1.2	2.3
Depreciation and amortization	(2.1)	(1.7)
Operating (loss)/profit before exceptional items and share based payments	(0.9)	0.6
Share of joint venture's net loss	(0.4)	-
Share based payments	(0.3)	(0.5)
Exceptional items	(2.5)	(9.3)
Net interest payable	(0.6)	(1.3)
Loss before taxation	(4.7)	(10.5)
Basic loss per share (pence)	1.6	8.1

 

The results reflect the challenging market conditions during the year. EBITDA before exceptional items and share based payments fell to £1.2 million from £2.3 million last year. However, the comparative figure benefitted from non-recurring income of £0.9 million and the write-back of a provision of £0.25 million and also benefitted from net exchange gains of £0.5 million compared with zero this year. Adjusting for these items, EBITDA was significantly ahead during 2009, which was an achievement given the difficult conditions and is a testament to the successful restructuring measures taken to reduce costs and preserve profitability.

 

There was an operating loss before exceptional items and share based payments of £0.9 million compared with a profit of £0.6 million in the previous year. Exceptional items of £2.5 million comprised banking costs of £1.0 million, reorganisation costs of £0.7 million, Los Angeles start-up costs of £0.6 million, the settlement of a contractual dispute amounting to £0.1 million and other items amounting to £0.1 million. The Group's share of the net loss of the Alpha-Airfayre Limited joint venture amounted to £0.4 million. Net interest payable fell by £0.7 million of which £0.5 million related to the elimination of interest on the convertible bonds now converted into ordinary shares.

 

There was a net loss before taxation of £4.7 million compared with a loss of £10.5 million in the previous year. The basic loss per share was 1.6 pence compared with a loss of 8.1 pence in the previous year. The improvement was substantially due to the reduction in losses and the full year impact of the increase in the number of ordinary shares in issue following the placing of ordinary shares and conversion of convertible bonds into ordinary shares in the second half of the previous year.

 

Net debt fell by £5.2 million to £0.5 million. However, the current year included the temporary benefit of £1.4 million owing to the Alpha-Airfayre Limited joint venture under transitional arrangements and excluding this amount the reduction in net debt would have been £3.8 million. The main driver of this reduction was the cash of £5.0 million released by the Alpha-Airfayre Limited joint venture transaction. At the year end the Company had bank facilities comprising a multi-option facility and sales finance facilities amounting to £3.25 million along with a net bank guarantee facility of £0.1 million. These facilities are repayable on demand and expire on 31 August 2010. As set out below, the Company is in discussions with potential providers of finance regarding new financial facilities.

 

 

SERVICES DIVISION

 

Year to 31 December	2009 £'m	2008 £'m
Revenue	39.0	60.5
EBITDA before non-recurring income, provision write-back and exchange differences	1.2	0.1
Non-recurring income	-	0.9
Provision write-back	-	0.3
Exchange differences	0.2	0.3
EBITDA before exceptional items and share based payments	1.4	1.6
Operating profit before exceptional items	0.3	0.4

 

The Division faced harsh trading conditions during the year, but delivered solid operating results notwithstanding the reduction in turnover. Of the lower turnover, £11.9 million was due to the change in the business model of the supply chain management activities to an agency model in 2008 and had minimal profit impact. Revenues also fell due to lower flight numbers and to the transfer of the in-flight catering activities into the Alpha-Airfayre Limited joint venture in November 2009, although this transfer had little profit impact due to seasonal reasons.

 

Whilst EBITDA before exceptional items and share based payments fell from £1.6 million to £1.4 million, the underlying performance was a significant improvement. The comparative figure benefitted from non-recurring income of £0.9 million, the write-back of a provision of £0.25 million and higher exchange gains of £0.1 million. Adjusting for these items, EBITDA was significantly ahead during 2009. This improved underlying performance was driven by the in-flight catering activities of Air Fayre Limited, the principal business within the Division.

 

The lower flight numbers suffered by Air Fayre Limited were due to cancellations resulting from the decline in passenger traffic experienced by the Division's customers operating out of London Heathrow. In anticipation of lower revenues, early in the year a major restructuring exercise was carried out that resulted in considerable cost savings. Measures were taken to remove excess direct labour, a layer of management and to implement more efficient working practices.

 

Media on the Move Limited had a difficult year due to reduced passenger traffic and lower media budgets. With the transfer of the in-flight catering activities to the Alpha-Airfayre Limited joint venture, Media on the Move Limited is the only remaining business in the Division. Looking into 2010, with some recovery expected in its markets, an improved performance is expected at Media on the Move Limited.

 

 

LOS ANGELES DIVISION

 

Year to 31 December	2009 £'m	2008 £'m
Revenue	15.1	2.5
EBITDA before exceptional items and share based payments	0.9	0.1
Operating profit before exceptional items	0.3	-

 

The Los Angeles facility, which commenced operations in November 2008 to serve all of United Airlines flights out of Los Angeles LAX airport, had a successful first full year of operations. It achieved an EBITDA profit before exceptional items and share based payments of £0.9 million. The start-up phase was completed during the first quarter and following that no additional exceptional start-up costs were incurred. The facility has consistently delivered a high standard of service to United Airlines and, in particular, scored highly on reliability performance by achieving its on time performance goal in every month of the year. The facility catered 25,568 United flights, an average of 70 a day, and provided potable water on the same flights without a single safety incident. The facility served United with 1,672,500 meals during the year.

 

With the United contract successfully bedded down, the Air Fayre in-flight catering model has been validated in the USA and has driven interest from other airlines operating out of Los Angeles LAX airport. The Division's focus has shifted to securing new customers and opportunities are currently being addressed that we are optimistic will lead to additional revenues during the current year.

 

As noted in my interim report, the USA has been identified as a main strategic opportunity for the Air Fayre in-flight catering model and the contract with United Airlines was a first step in realising that strategy. As additional customers are secured for the Los Angeles facility, the attractiveness of the business model will be further demonstrated and will create the basis for expansion into other US cities. The business model is protected in the USA by patent and, accordingly, provides the Division with the unique ability to exploit its advantages.

 

 

PRODUCTS DIVISION

 

Year to 31 December	2009 £'m	2008 £'m
Revenue	20.4	30.9
EBITDA before exchange differences	0.2	1.3
Exchange differences	(0.1)	0.2
EBITDA before exceptional items and share based payments	0.1	1.5
Operating (loss)/profit before exceptional items	(0.1)	1.4

 

The challenges faced by the international airline industry considerably affected the Division's financial performance for the year. Revenue fell by a third to £20.4 million. EBITDA before exceptional items and share based payments, albeit significantly lower, remained in profit at £0.1 million and was achieved as a consequence of the decisive measures taken to reduce costs. Of the £1.4 million reduction in EBITDA, £0.3 million was due to a turnaround from exchange gains to losses between years.

 

The significant decline in passenger traffic, particularly in the demand for seats in premium cabins, de-stocking by airlines using existing inventories and the deferral of a number of new product launches heavily impacted trading volumes leading to the reduced turnover. These events demonstrated the risk to the Division's trading performance from its high exposure to the aviation market. In response, management implemented a major reorganisation to redefine the Division's business model and realign its goals. A number of unprofitable accounts and product types were discontinued and new markets have been entered where the Division is able to apply its existing skills base and experience. These markets are beginning to generate attractive returns and we expect them to provide the basis for future growth in 2011 and beyond. Consistent with this change in model and target markets, headcount at all levels was reduced by over 50 per cent. and this delivered a considerable reduction in costs.

 

Whilst much of the year was disappointing the last quarter was significant in the rebuilding process. In Watermark Products important contracts were signed with Qantas Airways, Virgin Atlantic, British Airways and Air New Zealand. New business relationships have been formed for supply contracts to the hotel and retail industries and these markets will be a main focus of growth for the Division. The MNH Sustainable Cabin Services business continues to challenge the existing models for sustainable product supply and has entered into long term agreements with both Virgin Atlantic and Qantas Airways for world leading micro supply chain management programs.

 

We expect the current year to remain challenging, although with the substantial completion of the restructuring it will benefit from a full year of its lower cost base. The outlook for 2011 is encouraging with recovery expected in the airline market and growth from new segments particularly in the UK and Europe.

 

 

BOARD

 

We are delighted to have welcomed Joseph Golio and Carl Fry to the Board as Executive Directors during the year. Joseph is the President of the Los Angeles Division. He joined the Group in June 2008 and was instrumental in the start up and delivery of the Los Angeles facility. He is an airline catering industry veteran and has held a number of key roles within the industry, including Vice-President & Managing Director of Dobbs International and Senior Vice-President of North America West Operations for Gate Gourmet. Carl Fry is the Group's Chief Financial Officer and prior to joining the Board held that role in an interim capacity since January 2008. He is a Chartered Accountant and has significant experience of serving on the Boards of both publicly listed and private companies.

 

OUTLOOK

 

As set out above, the Company's bank facilities expire on 31 August 2010. In applying the going concern basis the Directors have assumed that appropriate new bank facilities will be available. Discussions are in progress with a number of potential providers of finance and the Directors consider they have a reasonable expectation that facilities sufficient for the Group's needs will be secured.

 

During the first quarter of 2010 the Group has performed in line with expectations. In the Products Division and Media on the Move Limited the Group has two businesses that are poised to benefit from recovery over the next two years. Growth is expected in the Los Angeles Division in the current year and exciting potential opportunities exist to expand into other US cities. Accordingly, whilst recovery in the Group's markets is only just beginning and the global economic recovery still tentative, we are increasingly confident of the Group's future success.

 

 

Stephen Yapp

Executive Chairman

 

 

CONSOLIDATED INCOME STATEMENT

for the 12 months to 31 December 2009

 

	Before exceptional items £'000	Exceptional items £'000	Total £'000
Revenue	74,537	-	74,537
Cost of sales	(59,435)	-	(59,435)
Gross profit	15,102	-	15,102
Operating and administrative costs (excluding exceptional items)	(16,273)	-	(16,273)
Exceptional items:
Banking costs	-	(1,022)	(1,022)
Reorganisation costs	-	(745)	(745)
Los Angeles start-up costs	-	(575)	(575)
Settlement of contract	-	(94)	(94)
Provision for onerous contract	-	(41)	(41)
Abortive disposal costs	-	(36)	(36)
Loss on disposal of subsidiary	-	(36)	(36)
Total operating and administrative costs	(16,273)	(2,549)	(18,822)
Operating loss	(1,171)	(2,549)	(3,720)
Operating loss before share based payments	(926)	(2,549)	(3,475)
Share based payments	(245)	-	(245)
Share of joint venture's net loss	(407)	-	(407)
Finance costs	(613)	-	(613)
Finance income	25	-	25
	(995)	-	(995)
Loss before tax attributable to equity shareholders	(2,166)	(2,549)	(4,715)
Income tax credit	71	-	71
Loss after tax attributable to equity shareholders	(2,095)	(2,549)	(4,644)
Loss per share (pence)
Basic			1.6p
Diluted			1.6p

 

 

CONSOLIDATED INCOME STATEMENT

for the 12 months to 31 December 2008

 

	Before exceptional items £'000	Exceptional items £'000	Total £'000
Revenue	91,344	-	91,344
Cost of sales	(75,331)	-	(75,331)
Gross profit	16,013	-	16,013
Operating and administrative costs (excluding exceptional items)	(15,898)	-	(15,898)
Movement in fair value of derivative financial instruments	(13)	-	(13)
Exceptional items:
Fair value charges relating to convertible bonds	-	(5,044)	(5,044)
Los Angeles start-up costs	-	(2,793)	(2,793)
Supply contract termination	-	(576)	(576)
Costs of refinancing	-	(543)	(543)
Bad debt	-	(300)	(300)
Reorganisation costs	-	(65)	(65)
Total operating and administrative costs	(15,911)	(9,321)	(25,232)
Operating profit/(loss)	102	(9,321)	(9,219)
Operating profit/(loss) before share based payments	633	(9,215)	(8,582)
Share based payments	(531)	(106)	(637)
Finance costs	(1,280)	-	(1,280)
Finance income	9	-	9
	(1,271)	-	(1,271)
Loss before tax attributable to equity shareholders	(1,169)	(9,321)	(10,490)
Income tax credit	5	-	5
Loss after tax attributable to equity shareholders	(1,164)	(9,321)	(10,485)
Loss per share (pence)
Basic			8.1p
Diluted			8.1p

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 12 months to 31 December 2009

 

	31 December 2009 £'000	31 December 2008 £'000
Loss for the year	(4,644)	(10,485)
Other comprehensive loss
Exchange differences on translating foreign operations	(125)	(200)
Other comprehensive loss, net of tax	(125)	(200)
Total comprehensive loss for the year attributable  to the equity shareholders of the parent company	(4,769)	(10,685)

 

 

CONSOLIDATED BALANCE SHEET

as at 31 December 2009

 

	31 December 2009 £'000	31 December 2008 £'000
Assets
Non-current assets Property, plant and equipment Goodwill Intangible assets Investment in joint venture	5,606 6,106 78 5,193	15,591 10,010 260 -
	16,983	25,861
Current assets Inventories Trade and other receivables Prepayments Current income tax Cash and short-term deposits	1,121 7,639 690 149 1,691	3,917 10,462 1,370 113 1,762
	11,290	17,624
Total assets	28,273	43,485
Equity and liabilities
Equity attributable to equity shareholders of the parent Issued share capital Share premium account Shares to be issued Capital redemption reserve Merger reserve Foreign currency translation reserve Retained earnings	2,906 36,352 100 24 1,521 (1,028) (26,702)	2,906 36,352 100 24 1,521 (903) (22,543)
Total equity	13,173	17,457
Non-current liabilities
Interest bearing loans and borrowings	949	1,633
	949	1,633
Current liabilities Trade and other payables Interest bearing loans and borrowings	12,860 1,291	18,576 5,819
	14,151	24,395
Total liabilities	15,100	26,028
Total equity and liabilities	28,273	43,485

 

 

CONSOLIDATED CASH FLOW STATEMENT

for the 12 months to 31 December 2009

 

	31 December 2009 £'000	31 December 2008 £'000
Net cash flows from operating activities
Loss after tax Tax credit Depreciation and amortisation Share of joint venture's net losses Gain on disposal Share based payments expense Fair value charges relating to warrants Fair value charges relating to convertible bonds Exceptional supply contract termination Finance income Finance costs Movement in fair value of derivative financial instruments Decrease in inventories Decrease in trade and other receivables Decrease in trade and other payables	(4,644) (71) 2,103 407 (193) 245 240 - - (25) 613   - 2,163 3,106 (3,752)	(10,485) (5) 1,664 - - 531 - 5,044 421 (9) 1,280   13 3,231 4,710 (5,884)
Cash inflows generated from operations	192	511
Interest received Interest paid Income taxes received/(paid)	25 (596) 35	9 (757) (26)
Net cash flows used in operating activities	(344)	(263)
Cash flows from investing activities
Proceeds from sale of property, plant and equipment and intangible assets Cash arising from joint venture transaction Purchase of property, plant and equipment Purchase of intangible assets	13 5,000 (269) (2)	33 - (7,446) (507)
Net cash flows used in investing activities	4,742	(7,920)
Cash flows from financing activities
Proceeds from borrowings Proceeds from issue of shares Payment of bank loan and finance lease obligations	- - (5,901)	2,115 7,920 (1,663)
Net cash flows generated from financing activities	(5,901)	8,372
Net (decrease)/ increase in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at beginning of year	(1,503) 594 1,762	189 (428) 2,001
Cash and cash equivalents at end of year	853	1,762

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the 12 months to 31 December 2009

 

	Issued share capital £'000	Share premium account £'000	Shares to be issued £'000	Capital redemption reserve £'000	Merger reserve £'000	Foreign currency translation reserve £'000	Retained earnings £'000	Total equity £'000
At 1 January 2009	2,906	36,352	100	24	1,521	(903)	(22,543)	17,457
Fair value charges relating to warrants	-	-	-	-	-	-	240	240
Cost of share based payments	-	-	-	-	-	-	245	245
Transactions with owners	-	-	-	-	-	-	485	485
Loss for the year	-	-	-	-	-	-	(4,644)	(4,644)
Exchange differences on translating foreign operations	-	-	-	-	-	(125)	-	(125)
Total comprehensive loss	-	-	-	-	-	(125)	(4,644)	(4,769)
At 31 December 2009	2,906	36,352	100	24	1,521	(1,028)	(26,702)	13,173

 

 

NOTES TO THE PRELIMINARY ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

 

1. Basis of preparation and statement of compliance

The financial information contained in this preliminary announcement does not constitute the Group's statutory financial statements for the year ended 31 December 2009 or 2008 but is derived from these financial statements. The financial statements for the year ended 31 December 2008 have been delivered to the Registrar of Companies. 

The financial statements for the year ended 31 December 2009 which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, and as issued by the IASB, will be forwarded to the Registrar of Companies following the Company's Annual General Meeting. The Auditors have reported on these financial statements; their reports were unqualified, but did include reference to an emphasis of matter regarding the Group's ability to continue as a going concern, and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

In preparing the financial statements the Directors are required to make judgements and estimates in applying accounting policies. The most significant areas where judgements and estimates have been applied are as follows:

 

Judgements

·; In determining the appropriate accounting treatment of the joint venture transaction entered into during the year the Directors have made certain key judgements:

 

- The Directors have given consideration as to whether Alpha-Airfayre Limited should be viewed as an associated undertaking or a jointly controlled entity. The Directors' view is that the indicators of joint control as set out within IAS 31 have been met as there are contractual agreements in place between the joint venture parties which reserve strategic investing, financing and operational matters for the joint agreement of both parties. As such the company is viewed as a jointly controlled entity which falls within the scope of IAS 31.

 

- IAS 31 currently states that the preferred method of accounting for jointly controlled entities is proportional consolidation, but the equity method is also permitted as an alternative. A revised standard based on ED 9 Joint Arrangements is expected to mandate the use of the equity method, although this standard has yet to be released. In considering the alternative methods of accounting for the investment in the Alpha-Airfayre Limited joint venture, the Directors view the equity method to be the most appropriate.

 

- In determining the appropriate accounting treatment for the transaction, the Directors have both considered the requirements of IAS 27 in its current form and referred to IAS 27 (revised 2008), which is not effective for the current accounting period. Neither version of the standard addresses the specific case of a disposal into a jointly controlled entity and, hence, the Directors have applied IAS 8 hierarchy (IAS 8. 10-12) on the basis that there is no specific guidance in IAS 27 in its current form and that improved guidance is available on disposals under IAS 8 (revised 2008), which does reflect the economic transaction. They have concluded that this is a full disposal of the Group's interest in the businesses operated by Air Fayre Limited, International Catering Limited and Elev8 Retail Limited and an acquisition of a 49 per cent. interest in Alpha-Airfayre Limited. IAS 27 (revised 2008) acknowledges that the disposal of a subsidiary is a significant economic event in which control is lost. As such a gain or loss is based on the difference between the fair value of proceeds (the interest in the new, combined business) and 100 per cent. of the net carrying amount of assets and goodwill disposed. These principles have been applied to this transaction as follows:

 

§ the proceeds from disposal are considered to be in substance the 49 per cent. interest acquired in Alpha- Airfayre Limited, which is recognised at fair value.

§ the gain (before transaction costs and certain adjustments) recognised on disposal represents the excess of these 'proceeds' over the net assets disposed of (including consolidated goodwill attributable to these businesses)

§ the 'proceeds' as determined for the disposal accounting are also treated as the deemed 'cost' of the investment acquired.

 

·; The Company initially financed the Group's investment in its Los Angeles facility by intercompany debt to Air Fayre CA Inc. During 2008 the Directors regarded this debt as being repayable in due course rather than as an equity investment and, accordingly, the exchange differences that arose during that year were taken to the income statement rather than to equity. Subsequently, the Directors considered that the debt was equity in nature and from 1 May 2009 all exchange differences were taken directly to equity. On 26 November 2009 the Directors decided to convert US$8,000,000 of the debt into equity and from that date the remaining US$3,240,000 debt was regarded as being repayable in due course and the exchange differences on such element were taken to the income statement. The Directors consider the exchange gains arising to be appropriately classified within operating and administrative costs rather than finance income.

 

·; In conjunction with consent by the lender to release their charges over the assets of Air Fayre Limited, International Catering Limited and Elev8 Retail Limited, enabling the disposal to proceed to the Alpha-Airfayre Limited joint venture of their operating activities and certain net assets, the lender imposed monthly bank facility fees. The Directors considered that fees in respect of a five month period November 2009 to March 2010 should be regarded as the cost of the lender's consent and have been charged as an exceptional item. At that time the Directors considered five months to be a reasonable period based on their expectation of the period required to refinance the Company's bank facility and avoid further such monthly bank facility fees.

 

·; In assessing the need for a provision in respect of certain threatened and outstanding litigation, the Directors consider that such litigation will not result in an outflow of economic resources.

 

Estimates

·; In arriving at the cost of the Group's investment in the Alpha-Airfayre Limited joint venture, a valuation was prepared by discounting the estimated value of the put option exercisable in April 2013 under which the Group can sell its interest to Alpha Flight UK Limited. The Directors considered that this was the most appropriate valuation method given the contractual nature of the option, the Directors' intention to exercise it, the existence of a call option exercisable in March and April 2013 under which Alpha Flight UK Limited can acquire the Group's interest at a substantially similar price and in light of the business plans prepared prior to the transaction setting out the future expectations of the joint venture parties. In preparing the valuation various assumptions have been made including discount rate and operating results.

 

·; In conducting the annual impairment test of goodwill, various significant assumptions have been made in arriving at the recoverable amounts of cash generating units.

 

·; The Group measures the cost of share based payments by reference to the fair value of the equity instruments at the date on which they are granted. Judgement is required in determining the most appropriate valuation model and assumptions are necessary in arriving at the inputs into such models.

 

·; The Group measured the cost of warrants issued to the lender in accordance with IFRS 2 by reference to the fair value of the warrants at the date on which they were granted. Judgement was required in determining the most appropriate valuation model and assumptions were necessary in arriving at the inputs into such model.

 

Going concern

The Group incurred a loss after tax attributable to equity shareholders of £4,644,000 for the year to 31 December 2009 and had net borrowings at that date of £549,000. These net borrowings comprised finance leases of £1,402,000 less net cash and cash equivalents of £853,000, although such amount included the temporary benefit of £1,398,000 held on behalf of and hence owing to the Alpha-Airfayre Limited joint venture under certain transitional arrangements. However, the Company's borrowing facilities, which presently comprise a multi-option facility and sales finance facilities totalling £3,250,000 and a net guarantee arrangement facility of £120,000, expire on 31 August 2010. In these circumstances, in the absence of additional cash resources becoming available, the Group's forecasts, taking account of reasonably possible changes in trading performance, show that during the next 12 months it will not have sufficient financial resources to enable it to continue in operational existence in its current form. The Directors have concluded that the combination of these circumstances represent a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern.

 

In assessing the financial requirements of the Group the Directors have prepared forecasts and have determined the level of financial resources required to maintain the Group in operational existence in its current form. In light of the expiry of the Company's existing borrowing facilities on 31 August 2010 and based on the Directors' assessment of the Group's funding needs, discussions are taking place with a number of potential providers of finance who have put forward non-binding term sheets setting out proposed facilities that would be sufficient in the opinion of the Directors to meet the Group's funding needs. The granting of these facilities would be subject to due diligence. Whilst such due diligence has not yet taken place and neither has detailed discussion and agreement on the terms of such facilities, the Directors consider they have a reasonable expectation that facilities sufficient for the Group's needs will be secured.

 

In considering the going concern position of the Group the Directors have made the following principle

assumptions:

 

1) The forecasts as referred to above prepared by the Directors for the purposes of assessing the financial resources of the Group are accurate in all material repects.

2) The discussions taking place with providers of finance will lead to facilities being granted of a level sufficient in the opinion of the Directors to meet the Group's funding needs for the forseeable future.

 

On the basis of the foregoing assumptions and having made enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the Group will have adequate financial resources to continue in operational existence for the foreseeable future and, therefore, that it is appropriate to continue to adopt the going concern basis in preparing these financial statements. Failing the foregoing assumptions being met, the Group may not have adequate financial resources to continue in operational existence for the foreseeable future and, in such circumstances, it may not be appropriate to continue to adopt the going concern basis. The financial statements do not include any of the adjustments that would result if the Group was unable to continue as a going concern, which would include writing down the carrying value of assets, including goodwill, to their recoverable amount and providing for any further liablities that may arise.

 

2. Segmental reporting

 

Historically, the Group was organised on a worldwide basis into two primary business segments, the Products Division and the Services Division. Following the award of the United Airlines contract and the successful commencement of operations at the Los Angeles facility in November 2008, Los Angeles has been treated as a separate division with effect from 1 January 2009. These reportable segments are the three strategic divisions for which monthly financial information is provided to the chief operating decision maker.

 

The Products Division provides a broad range of travel supplies predominately to the international travel industry on a global basis. The Los Angeles Division is a supplier of catering to the domestic and international travel industry within the United States of America. The Services Division was a supplier of catering to the international travel industry within the United Kingdom until the transfer of those operations to the joint venture with Alpha Flight UK Limited on 20 November 2009 and is a supplier of media services to the international travel industry in the United Kingdom. The Services Division was also engaged in supply chain management, but since 31 December 2009 this revenue stream ceased. Both the Products and Services Divisions provide marketing, design and consultancy services.

 

Segment revenues, expenses and results include transfers and transactions between business segments and between geographical segments. Such transactions are accounted for at competitive market prices which would be charged to unaffiliated clients for similar goods. All inter-segment transactions are eliminated on consolidation. Geographical segment revenues are based on the country of domicile; information is not available to produce geographical segment revenues based on sales by destination.

 

Segment assets include all operating assets used by a segment and consist principally of operating cash, receivables, prepayments, inventories, goodwill and property, plant and equipment, net of allowances and provisions. Whilst most assets can be directly attributed to individual segments, the carrying value of certain assets used jointly by two or more segments is allocated to the segments on a reasonable basis. Where assets cannot be apportioned, they are classified as unallocated corporate assets. Geographical segment non-current assets comprise fixed assets, investment in joint venture and goodwill and are based on the location of the assets and operations.

 

Segment liabilities include all operating liabilities and consist principally of finance leases, accounts payable, social security and other taxes, and accrued liabilities. Where allocation is not possible across more than one segment, such liabilities are classified as unallocated corporate liabilities.

 

Segment assets and liabilities do not include receivable or payable balances in respect of income taxes.

 

Exceptional items relate to significant non-recurring expenditure of an unusual nature.

 

The Group has one customer who accounted for revenues of £15.2m, which amounts to more than 10 per cent. of Group revenues. These revenues arise entirely in the Los Angeles Division.

 

Segmental information by business segment for 12 months to 31 December 2009

 

	Products Division £'000	Services Division £'000	Los Angeles Division £'000	Eliminations £'000	Total £'000
Revenue
Travel supplies, catering and media services Supply chain management Marketing, design and consultancy	20,409 - -	38,266 501 200	15,161 - -	- - -	73,836 501 200
Total revenue	20,409	38,967	15,161	-	74,537
Result
Segment result before exceptional items Exceptional costs: Reorganisation costs Los Angeles start-up costs Settlement of contract	(55)   (443) - (94)	296   (302) - -	267   - (575) -	-   - - -	508   (745) (575) (94)
Segment result	(592)	(6)	(308)	-	(906)
Unallocated corporate costs Exceptional costs: Banking costs Abortive disposal costs Provision for onerous contract Loss on disposal of subsidiary					(1,679)   (1,022) (36) (41) (36)
Operating loss Share of joint venture's net loss Finance costs					(3,720) (407) (613)
Finance income					25
Income tax credit					71
Loss after tax					4,644
Other information Segment assets Unallocated corporate assets	5,178	5,717	6,622	(2,130)	15,387 12,737
Current income tax					28,124 149
Consolidated assets					28,273
Segment liabilities Unallocated corporate liabilities	(4,703)	(7,621)	(10,235)	11,007	(11,552) (3,548)
Consolidated liabilities					(15,100)
Capital expenditure including intangible assets	80	122	21	48	271
Depreciation and amortisation	138	1,037	633	295	2,103
Other non-cash expenses/(income) included within segment results	4	(154)	-	195	45

 

Segmental information by geographical region for 12 months to 31 December 2009

 

		Revenue 12 months to 31 December 2009 £'000	Non-current assets 12 months to 31 December 2009 £'000
United Kingdom		52,926	11,564
United States of America		16,254	5,337
Other		5,357	82
		74,537	16,983

 

Segmental information by business segment for 12 months to 31 December 2008

 

	Products Division £'000	Services Division £'000	Los Angeles Division £'000	Eliminations £'000	Total £'000
Revenue
Travel supplies, catering and media services Supply chain management Marketing, design and consultancy Other non-recurring income Net sales to other segments	28,298 - - - 2,647	47,011 12,415 200 900 -	2,520 - - - -	- - - - (2,647)	77,829 12,415 200 900 -
Total revenue	30,945	60,526	2,520	(2,647)	91,344
Result
Segment result before exceptional items Exceptional costs: Los Angeles start-up costs Supply contract termination Bad debt Reorganisation costs	1,412   - - (270) (5)	370   - (576) (30) (60)	-   (2,793) - - -	39   - - - -	1,821   (2,793) (576) (300) (65)
Segment result	1,137	(296)	(2,793)	39	(1,913)
Unallocated corporate costs Exceptional costs: Fair value charges relating to convertible bonds Costs of refinancing					(1,719)     (5,044) (543)
Operating loss Finance costs					(9,219) (1,280)
Finance income					9
Income tax credit					5
Loss after tax					(10,485)
Other information Segment assets Unallocated corporate assets	6,979	15,270	7,461	(149)	29,561 13,811
Current income tax					43,372 113
Consolidated assets					43,485
Segment liabilities Unallocated corporate liabilities	(5,593)	(14,819)	(10,759)	11,129	(20,042) (5,986)
Consolidated liabilities					(26,028)
Capital expenditure including intangible assets	209	1,112	6,555	77	7,953
Depreciation and amortisation	112	1,207	110	235	1,664
Other non-cash expenses/(income) included within segment results	4	(90)	-	417	331

 

Segmental information by geographical region for 12 months to 31 December 2008

 

		Revenue 12 months to 31 December 2008 £'000	Non-current assets 12 months to 31 December 2008 £'000
United Kingdom		65,560	19,072
United States of America		18,994	6,664
Other		6,790	125
		91,344	25,861

 

3.  Exceptional items

	12 months to 31 December  2009 £'000	12 months to 31 December  2008 £'000
Banking costs Reorganisation costs Los Angeles start-up costs Settlement of contract Provision for onerous contract Abortive disposal costs Loss on disposal of subsidiary Fair value charges relating to convertible bonds Supply contract termination Costs of refinancing Bad debt	1,022 745 575 94 41 36 36 - - - -	- 65 2,793 - - - - 5,044 576 543 300
Total exceptional items	2,549	9,321

 

Banking costs

These costs comprised the following:

·; Facility fees, legal fees, accountants' fees and fees in respect of banking advice in connection with the replacement on 27 August 2009 of the Company's existing bank facilities, which were due to expire on 31 August 2009, with a new multi-option facility of £5,820,500 and a bank guarantee facility of £290,000. The facility fees included £240,000 being the fair value of the warrants over 14,528,624 ordinary shares issued to the lender.

·; Fees in respect of a waiver of bank covenants.

·; Facility fees, legal fees and accountants' fees in respect of the release by the lender of charges over the assets of Air Fayre Limited, International Catering Limited and Elev8 Retail Limited enabling the disposal to proceed of their operating activities and certain net assets to the Alpha-Airfayre Limited joint venture.

·; Legal fees in connection with the security taken by the lender over the Company's investment in its US operations.

 

Reorganisation costs

During 2009 reorganisation costs comprised redundancy costs and consultants fees in relation to restructuring. During 2008 reorganisation costs related to redundancy costs.

 

Los Angeles start-up costs

These costs related to the costs of the start-up of the Group's in-flight catering operation based in Los Angeles, USA. During 2009 they comprised the excess running costs incurred in the third to fifth months of operations and compensation paid to United Airlines in respect of excess costs they incurred at start-up. During 2008 they comprised the costs of establishing the operation together with the excess running costs incurred in the initial two months of operations.

 

Settlement of contract

This comprised the cost of settlement of a contractual dispute with a customer in relation to a rebate.

 

Provision for onerous contract

This comprises a provision in relation to onerous contractual obligations in respect of office equipment.

 

Abortive disposal costs

This relates to the costs incurred in respect of the abortive disposal of a subsidiary company.

 

Loss on disposal of subsidiary

The loss arose on the disposal of the operating activities and certain net assets of Air Fayre Limited, International Catering Limited and Elev8 Retail Limited to the Alpha-Airfayre Limited joint venture.

 

Fair value charges relating to convertible bonds

These fair value charges, which are non-cash, arose as a consequence of the conversion of the Company's convertible bonds into ordinary shares as follows:

 

·; £ 4,838,000 being the market value, calculated at a price of 6.25 pence per share, of the additional ordinary shares that were issued on conversion of the bonds that arose from the change in their conversion terms from 20 pence per share to 7.5 pence per share.

 

·; £100,000 being the fair value of the warrants issued in connection with the change in the conversion terms of the bonds.

 

·; £106,000 being the fair value of the additional ordinary shares that would be issued under the matching awards provisions of the Executive Incentive Share Plan arising from the change in the conversion terms of the bonds.

 

Supply contract termination

In July 2008 a dispute was settled with a significant supplier under which a 5 year contract was renegotiated resulting in the expectation of reduced costs and increased flexibility. Payments totalling £500,000 attributable to such terms and cost savings were initially capitalised as an intangible asset to be amortised over the life of the contract. Subsequently, the supplier entered Administration and the unamortized balance of £421,000 has been written off. In addition, legal and other costs amounting to £155,000 were incurred and have been written off.

 

Costs of refinancing

The Group expensed costs of £543,000 relating to changes to its capital structure, including the placing of 120,000,000 ordinary shares at a placing price of 7.5 pence to raise £9,000,000 before expenses, the conversion of the Company's convertible bonds of £9,288,035 into ordinary shares following a change in the terms of conversion from 20 pence per share to 7.5 pence per share and changes to the terms of the Group's borrowing facilities.

 

Bad debt

The bad debt arose on the Administration of Silverjet.

 

4.  Loss per share 

 

The loss per share is calculated by dividing the loss after tax attributable to equity shareholders (numerator) by the weighted average number of ordinary shares in issue during the year (denominator).

 

The diluted loss per share is calculated using the same numerator with the denominator adjusted for the dilutive effects of share options and shares to be issued. As the Group has made a loss in the current year and previous year, no adjustment is made to the denominator for the impact of share options and shares to be issued because the potential shares are anti-dilutive.

 

Adjusted loss per share, both basic and dilutive, use the denominator described in the appropriate paragraphs above. For both adjusted basic loss per share and adjusted diluted loss per share, the numerator is adjusted to remove the post tax impact of exceptional items from the calculations.

 

The weighted average number of shares in issue during the year was 290,572,553 (2008: 130,010,939). The following represents loss data used to calculate basic, diluted and adjusted loss per share:

	12 months to 31 December 2009 £'000	12 months to 31 December 2008 £'000
Loss table Loss after tax attributable to equity shareholders Exceptional items (post tax)	(4,644) 2,549	(10,485) 9,321
Adjusted net loss after tax attributable to equity shareholders	(2,095)	(1,164)
	Loss per share 12 months to 31 December 2009 Pence	Loss per share 12 months to 31 December 2008 Pence
Loss per share table Basic loss per share Diluted loss per share Adjusted basic loss per share Adjusted diluted loss per share	1.6 1.6 0.7 0.7	8.1 8.1 0.9 0.9

 

5. Investment in joint venture

 

	£'000
Cost
Additions at valuation	5,600
At 31 December 2009	5,600
Share of post acquisition losses
Share of losses for the year after taxation	(407)
At 31 December 2009	(407)
Net book value
At 31 December 2009	5,193

 

The investment in joint venture comprises a 49 per cent. interest in Alpha-Airfayre Limited, which was established to combine primarily the Heathrow in-flight catering operations of the Group and Alpha Flight UK Limited. For the purposes of the Group's consolidated financial statements this transaction has been treated as a full disposal of the businesses of Air Fayre Limited, International Catering Limited and Elev8 retail Limited (represented by their operating activities and certain net assets) and the acquisition of a 49 per cent. interest in Alpha-Airfayre Limited.

 

Under the terms of the transaction, fixed assets totalling £7,603,000 together with net current liabilities of £6,100,000 were transferred to Alpha-Airfayre Limited giving net assets transferred of £1,503,000. The net current liabilities transferred of £6,100,000 included an amount due to the Company of £5,000,000, which was repaid immediately following completion of the transaction. The receipt is shown in the consolidated cash flow statement under cash flows from investing activities.

 

The resulting investment in the joint venture was valued by the Directors at £5,600,000. After taking account of the net assets transferred of £1,503,000 and the net book value of goodwill that originally arose on the acquisition of Air Fayre Limited of £3,904,000, a gain of £193,000 arose. After deducting transaction costs, accelerated depreciation of £50,000 and adjustments to the net assets of Air Fayre Limited and Elev8 retail Limited consequent on the transaction, a loss arose of £36,000, which has been shown as an exceptional item. The accelerated depreciation arose on assets not transferred to the joint venture and which became redundant as a result of the transaction.

 

The valuation of £5,600,000 was determined by reference to the put option exercisable in April 2013 under which the Group can sell its interest in Alpha-Airfayre Limited to Alpha Flight UK Limited. The Directors considered that this was the most appropriate valuation method given the contractual nature of the option and because of the Directors' intention to excercise it. This approach is supported by the existence of a call option exercisable in March and April 2013 under which Alpha Flight UK Limited can acquire the Group's interest at a substantially similar price. Under the terms of the put option the disposal consideration is calculated based on a multiple of the earnings before interest, depreciation and taxation of Alpha-Airfayre Limited for the year ending 31 December 2012 and its net debt at that date. In preparing the valuation the Directors considered the range of potential operating results of Alpha-Airfayre Limited identified in the business plans. A discount rate of 20 per cent. was selected by the Directors to reflect risk factors, including those in relation to achievement of the operating results on which the valuation was based.

 

The valuation of £5,600,000 of the Group's 49 per cent. interest in the joint venture is allocated as follows:

 

	£'000
Goodwill	3,333
Other net assets at fair value	2,267
	5,600

 

Whilst these elements are not separately recognised in the balance sheet under the equity method of accounting, this allocation is of relevance for goodwill impairment considerations. A review was conducted to establish the existence of other intangible assets and a valuation was carried out on customer contracts and relationships using the multi-period excess earning method. No value was ascribed to customer contracts and relationships under that valuation.

 

The Group's share of tangible fixed assets, current assets, current liabilities, income and expense was as follows:

 

	31 December 2009 £'000
Tangible fixed assets Current assets Non-current assets	5,677 6,477 (10,293)
Share of net assets	1,861
Revenue Operating costs Finance charges Taxation	4,252 (4,724) (5) 70
	(407)

 

6. Additional cash flow information

 

	1 January 2009 £'000	Cash flow £'000	Exchange differences £'000	Non-cash movements £'000	31 December 2009 £'000
Cash and cash equivalents	1,762	(1,503)	594	-	853
Increase/(decrease) in cash Finance leases Bank loan	1,762 (2,217) (5,235)	(1,503) 666 5,235	594 - -	- 149 -	853 (1,402) -
Net debt	(5,690)	4,398	594	149	(549)

 

	1 January 2008 £'000	Cash flow £'000	Exchange differences £'000	Non-cash movements £'000	31 December 2008 £'000
Cash and cash equivalents	2,001	189	(428)	-	1,762
Increase/(decrease) in cash Finance leases Convertible bonds Bank loan	2,001 (500) (8,474) (6,500)	189 (1,717) - 1,265	(428) - - -	- - 8,474 -	1,762 (2,217) - (5,235)
Net debt	(13,473)	(263)	(428)	8,474	(5,690)

 

Cash and cash equivalents comprise:

	1 January 2008 £'000	31 December 2008 £'000	31 December 2009 £'000
Cash and short term deposits	2,001	1,762	1,691
Bank overdraft	-	-	(838)
	2,001	1,762	853

 

7. Annual accounts

 

The annual report and accounts will be posted to all shareholders on 2 June 2010 and will be available from the Company's website at www.journeygroup.plc.uk and its registered office:

 

The Encompass Centre International Avenue

Heston

Middlesex

TW5 9NJ

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