10th Aug 2006 08:28
Air Music & Media Group PLC10 August 2006 10 AUGUST 2006 AIR MUSIC & MEDIA GROUP PLC ("AIR GROUP" or "THE GROUP") FINAL RESULTS FOR THE TWELVE MONTH PERIOD ENDED 31 MARCH 2006 The Board of Air Group, the UK distributor of home entertainment products, ispleased to announce its final results for the year ended 31 March 2006, whichincorporate a full years' trading of the distribution business acquired in 2004. HIGHLIGHTS: • Sales for the year of £72.3 million (2005: £49.8 million as reported, £69.3 million on a proforma basis); • Profit before tax, goodwill amortisation and exceptional items of £4.8 million (2005: £3.9 million as reported, £5.0 million on a pro forma basis); • Board reorganisation and streamlining completed; • Appointment of Peter Cowgill as Non-Executive Chairman; • Relocation of Head Office to Leyland, Lancashire; • Centralisation of UK distribution and administration functions. Peter Cowgill, Non-Executive Chairman of Air Group said: "The Board believesthat Air Group's core business is well placed to enhance profitability byexpanding its customer base and product offering. Despite difficult conditionsin the retail sector, early indications for the first quarter of this financialyear show that Group sales remain at a similar level to last year. I am excitedabout working with Air Group and see the opportunity for a significant marketre-rating as investors become aware of the prospects for the Group. I would liketo thank the team and our investors for their continued support during thisperiod of significant change and I look forward to the next interim statement." Enquiries: Air Music & Media Group plc Tel: 01772 455 000Peter Cowgill, Non-Executive ChairmanAlex Sorrell, Finance Director Bishopsgate Communications Ltd. Tel: 020 7430 1600Dominic Barretto Mobile: 07930 450 156Fran Read Mobile: 07952 356 889 CHAIRMAN'S STATEMENT I am delighted to be able to report on the final results for Air Group in myfirst statement as the Non-Executive Chairman of the Group. Results The Group results for the year incorporate a full years' trading at thedistribution business acquired in 2004 and significant exceptional items that,together, render simple year on year comparisons meaningless. The table belowillustrates the underlying results of the Group: Pre-acquisition results of Distribution Group proforma business Reported 31/03/2006 31/03/2005 (1/4/04 - 7/10/04) 31/03/2005 £ million £ million £ million £ million Turnover 72.3 69.3 19.5 49.8 Reportedoperating profit 1.6 2.3 1.1 1.2Goodwill andexceptional 3.9 3.0 - 3.0itemsNormalisedoperating profit 5.5 5.3 1.1 4.2 Interest (0.7) (0.4) 0.1 (0.4) Profit before tax(after goodwilland exceptional 0.9 2.0 1.2 0.8items)Profit before tax(before goodwilland exceptional 4.8 5.0 1.2 3.9items) The comparative increase in sales reflects turnover increases at thedistribution businesses of £6.8 million, reductions in the publishing businessesof £5.4 million (of which £2.2 million was attributed to our DVD business)static performance at our North American business and £1.6 million generatedfrom acquisitions in the year. Exceptional items This trading period incorporates the costs associated with the strategic review(£1.4 million) announced this time last year, which has resulted in a number ofchanges for the Group. These changes include: • Streamlining of the Board, slimming down from 9 people to 3; • Relocating the head office and centralising the UK distribution and administration functions to Leyland, the financial benefits of which are anticipated during the current financial year; • Rationalising and reducing overheads in our UK publishing businesses; and • Exiting from our loss making Hollywood DVD subsidiary. As we reported in the interim statement, the Group was involved in litigationwith former vendors of Hollywood DVD in relation to the acquisition of thatsubsidiary. The costs to the Group were £0.3 million. In June 2006 the Group was notified of the results of a mechanical royaltiesaudit undertaken in North America by the Harry Fox Agency ("HFA"). The auditspanned the 10 year period October 1996 to September 2005. HFA claim thatmechanical royalty payments to HFA had been understated by US$1.1 million duringthe period. The Group has commissioned an external specialist in order toinvestigate the claim and assess its merits. Although at the date of thesefinancial statements the investigation is not complete and there is considerableuncertainty as to the validity and amount of the understatement the directorsconsider it appropriate to provide for a substantial element of the claim. Thetotal amount provided has been charged within cost of sales. As the amounts arematerial to the Group financial statements, that element of the claim (£0.4million) that may relate to previous periods has been reported as an exceptionalitem. Debt and working capital Air Group remained comfortably within its banking facilities during the peakworking capital period and continued to meet scheduled borrowing repayments. Networking capital was reduced by £0.5 million in the year and net debt was reducedby £1.3 million. The Group continues to focus on utilising free cash toaccelerate borrowing repayments. Current trading and outlook The Group is focussed on identifying products that can be traded at pricesattractive to both retailers and their customers, in movies, music or games. TheGroup is already experiencing the benefits of distributing own label products,primarily in the low price music sector, through its enlarged customer base. TheGroup continues to target the older and less fashion conscious consumer bycreating unique in store promotions encouraging impulse purchases. The Board believes that Air Group's core business is well placed to enhanceprofitability by expanding its customer base and product offering. Despitedifficult conditions in the retail sector, early indications for the firstquarter of the current financial year show that Group sales remain at a similarlevel to last year. I am excited about working with Air Group and see theopportunity for a significant market re-rating as investors become aware of theprospects for the Group. I would like to thank the team and our investors fortheir continued support during this period of significant change and I lookforward to the next interim statement. I am confident this management team will deliver profitable growth of the Group. Peter Cowgill Non-Executive ChairmanOPERATING REVIEW We are a group that is centred around a home entertainment products distributionbusiness servicing customers in the UK. We position our product offering toappeal to impulse buyers. The following summarises the performance of thedifferent businesses in the Group. Music Box Leisure ("MBL") MBL is the core of the Group, providing significant value added activity to thesale of home entertainment products. MBL's customers are exclusively in, whatthe industry terms, the "non traditional" sector, i.e. supermarkets, discountretailers, motorway service stations etc. rather than conventional high streetcd and dvd shops. The emphasis with customers is less about having the latesthit film or cd and more about delivering strong sales and margins throughtargeted promotions. MBL has its own in-house merchandising team which allows itto directly manage the quality of its customers in-store operations. It combinesits customer sales data with strong buying skills to produce good retail marginsand delivered £47.2 million external sales during the year. In the currentfinancial year it has strengthened the sales force with several new appointmentstargeted at further developing the potential of the non traditional sector andtargeting high footfall retail outlets. The new team has made some earlysuccesses giving confidence that MBL will continue to grow both the top and thebottom line this year. ESD Wholesale ("ESD") ESD is a wholesaler primarily to independent and internet retailers. Retailerpressure has seen a squeeze on pricing throughout the supply chain. The Grouphas been able to use its buying skills effectively in order to mitigate theeffect on margins; however this market remains difficult at present for allmembers of the supply chain. ESD delivered £14.4 million in external sales inthe year under review. The Board's strategy for the current year is to remainfocussed on the Group's buying skills to provide better margin opportunities,while reducing working capital investment. Air Music and Media Sales (AMM Sales) AMM Sales plays a supporting role to the core of our distribution business. TheBoard radically restructured this business during the year, significantlyreducing overheads by eliminating duplicated costs. The business continues toface challenges and the Board is in the process of further refocusing operationsto reduce our working capital investment and increase profitability at theexpense of top line sales growth. The Group continues to grow internal sales,which returns substantial gross margins, and expects inter group sales torepresent around 25% of AMM Sales turnover in the coming year. Legacy Corporation ("Legacy") Although not part of the core operation, Legacy continued to performsatisfactorily. Due to differences in copyright rules, the business operates ona relatively stand alone basis. Play Media Shortly before Christmas last year the Group took advantage of an opportunity totake control of Play Media, which operated a small group of retailers basedprimarily in the North East and Yorkshire. The Board piloted an idea of usingthe stores as a clearance outlet for overstocks within the group, supplementedwith higher price point product that the group were able to purchase onaggressive terms. The Board does not intend to expand the operations of PlayMedia. Strategy and Risks The Group's customer base is heavily weighted in the UK supermarket sector,which accounts for over 50% of group turnover. The Group's customers areretailers for whom profit margins, as a whole, are continually under pressureand this pressure is in turn placed on the Group. The Board has strengthened theUK sales team to aggressively target new customers and widen the Group'scustomer base. The pervasive effects of the internet inevitably present risks and offeropportunities for the Group. The Group focuses on mainstream product, not newchart releases and as such does not feel the effects of internet downloading asacutely as other distributors. The Board is exploring ways in which the Groupcan benefit from distributing its products on-line. The Board has kept its profile low in the year under review as it looked inwardto refine its strategy. There have been a number of tough decisions to be made,involving cutting staff, exiting underperforming business operations andcentralising management and control. The Group's buying strategy requires it tomaintain a high stock level, although this is spread across a broad range oftitles. The Group retain the greatest profits through distribution of itsin-house titles through MBL and through the added value it provides the nontraditional sector. Because the Group targets the non traditional sector itshorizons are wide - the Board see a large untapped customer base for which theGroup can help deliver incremental sales and increased margins. The Board'sinvestment in people is targeted at this strategy. Trevor Allan Chief ExecutiveFINANCIAL REVIEW Turnover and margins Turnover for the year ended 31 March 2006 was £72.3 million, an increase from£49.8 million reported last year. The increase is fundamentally distorted by theimpact of the acquisition of the distribution business (encompassing MBL andESD) that contributed to only six months of the Group results in the previousyear. On a pro forma basis, using full year turnover for Music Box Leisure andESD Wholesale in the previous year, the growth in turnover was £3.0 million(4.3%). Pre acquisition results of Distribution proforma business Reported 31/03/2006 31/03/2005 (1/4/04 - 7/10/04) 31/03/2005Turnover £ million £ million increase £ million £ million Music Box Leisure 47.2 46.6 1.3% 16.8 29.8ESD Wholesale 14.4 8.2 75.6% 2.7 5.5Air Music andMedia Sales 4.5 10.0 (55.0)% 10.0LegacyEntertainment 4.6 4.5 2.2% 4.5Play Media 1.6 - 0.0% 72.3 69.3 4.3% 19.5 49.8 Despite challenging retail conditions, MBL delivered modest growth. ESDdeveloped from a standing start in June 2004 and continued to gain market sharein the year. Turnover, expressed in local currency, at Legacy was broadlystatic. There was a significant fall in sales at AMM Sales, the UK publishingbusiness. The Board has rationalised the operations at AMM Sales in an attemptto return that business to profitability in the current financial year. Reported gross margins before exceptional items for the Group reduced to 19.7%(2005: 21.5% as reported, 20.6% on a proforma basis). Excluding intercompanytrading, gross margins at MBL increased to 21.6% (2005: 20.3%) and gross marginsat ESD increased to 8.3% (2005: 6.8%). Gross margins in the publishingbusinesses fell from 29.0% to 24.3%. Gross margins at Play Media were 19.7%. Normalised profitability As described in note 2 there were three exceptional items in the year totalling£2.1 million. While these have significantly impacted the reported profitabilityof the Group, the benefits of our strategic review should be seen in the currentyear. On a pro forma basis, incorporating the pre acquisition results of thedistribution business and excluding goodwill amortisation, exceptional items andinterest, Group operating profit was £5.5 million (2005:£5.3 million).Normalised operating profit margin was 7.6% (2005: 7.6%). Borrowings The Group's net borrowings position at 31 March 2006 was £6.4 million, areduction of £1.3 million. The Group's facilities consist of £4.8 million termloans, £3.0 million revolving credit, £1.8 million of vendor loan notes and asales financing facility linked to the trade debtors position of MBL. Alex Sorrell Finance Director Consolidated Profit and Loss Account For the year ended 31 March 2006 Before Exceptional Total As exceptional items (note Restated items 2) Total 2006 2006 2006 2005 £'000 £'000 £'000 £'000Group turnoverExistingactivities 70,684 70,684Acquisitions 1,603 1,603 --------- -------- -------- -------- 72,287 72,287 49,827 --------- -------- -------- --------Cost of salesExistingactivities (56,696) (446) (57,142)Acquisitions (1,289) (1,289) --------- -------- -------- -------- (57,985) (446) (58,431) (39,113) --------- -------- -------- --------Gross profitExistingactivities 13,988 (446) 13,542Acquisitions 314 314 --------- -------- -------- -------- 14,302 (446) 13,856 10,714 --------- -------- -------- --------Distribution costsExisting activities (1,653) (1,653)Acquisitions - - --------- -------- -------- -------- (1,653) (1,653) (1,148) --------- -------- -------- --------Administrative expensesExistingactivities (8,458) (1,686) (10,144)Acquisitions (428) (428) --------- -------- -------- -------- (8,886) (1,686) (10,572) (8,335) --------- -------- -------- --------Group operating profitExistingactivities 3,877 (2,132) 1,745Acquisitions (114) (114) --------- -------- -------- -------- 3,763 (2,132) 1,631 1,231 --------- -------- -------- -------- Interest, net (698) (430) -------- -------- Profit on ordinaryactivities beforetaxation 933 801 Taxation (1,064) (1,328) -------- --------Loss on ordinaryactivitiesafter taxation (131) (527) Dividends (60) - -------- --------Retained lossfor thefinancial year (191) (527) ======== ========Basic earningsper share (note 3) (0.8)p (5.6)p ======== ======== Diluted earnings pershare (note 3) (0.8)p (4.5)p ======== ======== The profit and loss account has been prepared on the basis that all operationsare continuing operations. Statement of Group Total Recognised Gains and LossesFor the year ended 31 March 2006 Total As Restated Total 2006 2005 £'000 £'000Loss for thefinancial year (191) (527)Exchange adjustmentsoffset in reserves 56 3 -------- ---------Total recognisedlosses for the year (135) (524) ======== ========= Consolidated Balance SheetAs at 31 March 2006 As restated 2006 2005 £'000 £'000 £'000 £'000Fixed AssetsIntangible assets 34,142 36,204Tangible assets 591 608 ------- ------- 34,733 36,812Current AssetsStocks 7,965 7,983Debtors 11,136 11,283Cash at bank and in hand 2,205 3,584 ------- ------- 21,306 22,850Creditors :Amounts fallingdue within one year (19,818) (22,581) ------- -------Net Current Assets 1,488 269 ------- --------Total Assets Less CurrentLiabilities 36,221 37,081 Creditors :Amounts falling due after morethan one year (2,034) (4,137)Provisions for liabilities and charges (643) - ------- --------Net Assets 33,544 32,944 ======= ========Capital and Reserves Called up sharecapital - equity interests 12,673 9,248Shares to be issued 206 10,000Share premium 21,447 14,343Profit and loss account 2,018 2,153Merger reserve (2,800) (2,800) ------- -------Shareholders' Funds 33,544 32,944 ======= ======== Consolidated Cash Flow StatementFor the year ended 31 March 2006 2006 2005 £'000 £'000 £'000 £'000Net cash inflow fromoperating activities (Note 1) 5,099 4,293 Returns on investments and servicing of financeInterest received 64 66Interest paid (762) (413) ------ -------Net cash outflow from returns oninvestments and servicing of finance (698) (347) Taxation Corporation tax paid (2,046) (771) Capital expenditure and financial investmentPayments to acquire tangible fixed assets (197) (261)Receipts from sale of tangible fixed assets 68 3Payments to acquire intangible fixed assets (25) (303)Receipts from sale of intangible fixed assets - 3 ------ -------Net cash outflow from capital expenditureand financial investment (154) (558) ------ --------Acquisitions and disposalsPurchase of subsidiary undertaking (108) (16,687)Net (overdraft)/cash acquired with subsidiary (143) 3,273Deferred consideration paid for subsidiary (623) (372) ------ -------Net cash outflow from acquisitions and disposals (874) (13,786) Equity dividends paid to shareholders (60) - ------ --------Cash outflow before financing 1,267 (11,169) Financing Issue of ordinary share capital - 5,126Repayments of long term debt (1,997) (739)Hire purchase repayments (64) (15)New secured loan - 5,475New short-term borrowings - 3,000 ------ ------- (2,061) 12,847 ------ --------(Decrease)/Increase in cash in the year (794) 1,678 ====== ======== Notes to the Consolidated Cash Flow StatementFor the year ended 31 March 2006 1 Reconciliation of operating profit to 2006 2005 net cash inflow from operating activities £'000 £'000 Operating profit 1,631 1,231 Depreciation 454 209 Amortisation of intangible assets 2,254 1,475 Exceptional item - 2,130 Loss/(Profit) on disposal of tangible assets 17 (2) Increase in stock (276) (51) (Increase)/Decrease in debtors (10) 853 Increase/(Decrease) in creditors and provisions 1,040 (1,555) Net effect of foreign exchange differences (12) 3 --------- ---------- Net cash inflow from operating activities 5,099 4,293 ========= ========== 2 Analysis of net debt At 1.4.2005 Cash Exchange At 31.3.2006 Movement movement £'000 £'000 £'000 £'000 Cash in hand, at bank 3,584 (1,425) 45 2,205 Overdraft (631) 631 - - ------- ------- ------- -------- 2,953 (794) 45 2,205 Debt due within one (6,514) (56) - (6,570) year Debt due after one year (4,087) 2,053 - (2,034) Obligations under hire purchase (65) 64 - (1) ------- ------- ------- -------- (10,665) 2,061 - (8,605) ------- ------- ------- -------- Total (7,712) 1,267 45 (6,400) ======= ======= ======= ======== 3 Reconciliation of cash flow to movement in net debt 2006 2005 £'000 £'000 (Decrease)/Increase in cash in the year (794) 1,678 Change in net debt resulting from cashflows 2,061 (7,720) Change in net debt resulting from exchange differences 45 - Change in net debt resulting from other changes - (1,578) Net debt at beginning of the year (7,712) (92) --------- ---------- Net debt at the end of the year (6,400) (7,712) ========= ========== Notes to the Consolidated Cash Flow Statement For the year ended 31 March 2006 (continued) 4 Purchase of subsidiary undertakings 2006 2005 £'000 £'000 Net assets acquired: Tangible assets 295 401 Stock 123 6,382 Debtors 205 6,223 (Bank overdraft)/Cash at bank (143) 3,273 Creditors: amounts falling due within one year (457) (9,828) --------- ---------- 23 6,452 Goodwill 594 31,809 --------- ---------- 617 38,261 ========= ========== Satisfied by: Shares allotted 303 10,000 Cash (including expenses) 108 16,687 Loan notes - 1,574 Deferred consideration (to be paid by issue of shares) 206 10,000 --------- ---------- 617 38,261 ========= ========== Notes to the Financial Statements For the year ended 31 March 2006 1. The financial information contained in this document does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.The comparative figures for the financial period ended 31st March 2005 have beenextracted from the company's audited financial statements for that financialperiod. The statutory accounts for the period ended 31 March 2005 have beengiven an unqualified audit report and have been filed with the Registrar ofCompanies. 2. Exceptional items In June 2006 the Group was notified of the results of a mechanical royaltiesaudit undertaken in North America by the Harry Fox Agency ("HFA"). The auditspanned the 10 year period October 1996 to September 2005. HFA claim thatmechanical royalty payments to HFA had been understated by US$1.1 million duringthe period. The Group has commissioned an external specialist in order toinvestigate the claim and assess its merits. Although at the date of thesefinancial statements the investigation is not complete and there is considerableuncertainty as to the validity and amount of the understatement the directorsconsider it appropriate to provide for a substantial element of the claim. Thetotal amount provided has been charged within cost of sales. As the amounts arematerial to the Group financial statements, that element of the claim that mayrelate to previous periods has been reported as an exceptional item of £446,000(US$860,000). In July 2005 the Board announced that it was undertaking a strategic review ofthe Group's operations. This involved the placing into Administration ofHollywood DVD, the rationalization of the Board structure and the centralisationand relocation of corporate, finance, IT and distribution functions to Leyland.In addition, during the period the Group was involved in litigation with formervendors of Hollywood DVD in relation to the acquisition of that subsidiary. The exceptional charges associated with the strategic review and litigation areanalysed below: £,000Strategic reviewSettlements with former directors 581Write-off of intercompany balances on Administrationof Hollywood DVD Limited 329Write-off of unamortized DVD rights and associatedartwork 165Write-off of IT licenses, development costs and otherrelated costs previously capitalised 173Redundancy and related payments 56Associated legal and professional fees 111Other assets written off 13 ------- 1,428 -------Litigation with former vendors of Hollywood DVD LimitedSettlement costs 75Associated legal costs 183 ------- 258 ------- -------Total exceptional items included in administrativeexpenses 1,686 ======= The estimated effect of the exceptional items on the taxation charge for thefull year is to reduce the tax charge by £518,000 Notes to the Financial Statements For the year ended 31 March 2006 (continued) 3. Earnings Per Share In accordance with FRS22, the basic earnings per share has been calculated onthe loss after tax of £131,000 (2005: £527,000 loss) and the weighted averagenumber of ordinary shares in issue during the year of 15,670,150 75p shares(2005: 9,389,099 75p shares). The earnings per share has been fully diluted to take into account the actualshares issuable as deferred consideration on the purchase of MaximumEntertainment Limited. This increased the weighted average number of shares usedin the basic EPS calculation from 15,670,150 to 15,692,777 used in the fullydiluted EPS calculation. Normalised earnings per share, as disclosed below, are calculated using theprofit/loss after tax for the financial year having added back exceptional items(after adjusting for the effect of tax) and goodwill amortisation over the basicand diluted weighted average shares in issue during the year. Year ended 31.03.2006 Year ended 31.03.2005 £ £Loss aftertaxation (131) (527)Exceptionalitems 2,132 2,130Goodwillamortisation 1,740 925Taxation onexceptionals (518) - ------- -------Profit fornormalisedcalculation 3,223 2,528 ======= ======= Basic loss pershare (0.8) p (5.6) p ======= =======Basicnormalisedearnings pershare 20.6 p 26.9 p ======= ======= Diluted lossper share (0.8) p (4.5) p ======= =======Dilutednormalisedearnings pershare 20.5 p 21.4 p ======= ======= 4. Annual report The Annual Report will be posted to shareholders in mid-September. 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,Lancashire, PR26 6TZ. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MUBL.L