Final Results

14 June 2016

Findel plc ("Findel" or "the Group")

A YEAR OF PROGRESS TO IMPROVE LONGER-TERM PROSPECTS

Results for the 52 weeks ended 25 March 2016

Findel, the UK Home Shopping and Education business, today announces its results for the 52 week period ended 25 March 2016.

Financial Summary

Financial Highlights

^ from continuing operations

 * before exceptional items ** overall net debt excluding the securitisation facility and finance leases

Summary

· Revenue growth from continuing operations 0.9% ahead of prior year at £410.6m with profit before tax* from continuing operations down £2.9m to £24.8m

· Following the successful sale of Kitbag for c£14m, the Group is now solely focussed on the growth of its two core businesses

· Express Gifts saw a mixed performance during the year but ended strongly

o Product sales up 2.3% to £224.9m and financial services revenues up 7.6% to £88.1m

o Operating profits* down by £1.7m to £31.7m due mainly to the impact of foreign exchange

o Significant operational improvements introduced during the year (including expansion of product range, credit changes, investment in marketing and own call centre operation in the Philippines) to improve future product sales growth prospects

o Sales since the start of 2016 returned to healthy levels in line with medium-term objectives

· Findel Education had a difficult year reflecting market conditions, but is on plan to deliver its transformational programme

o Sales down by 8.1%, although customer numbers in the key School brands stabilised

o Average spend levels continue to fall due to budget constraints

o Improved margins and tight cost control mitigated the impact on operating profit* to a £1.0m reduction to £3.2m

o Warehouse consolidation project on track to be completed in 2016 with savings of £2-3m p.a. anticipated from FY18 onwards

· Exceptional items^ totalling £26.5m recognised during year, within which:

o £14.4m relates to customer redress and refund provisions at Express Gifts

o £5.6m in respect of the warehouse consolidation project for Findel Education

o £4.3m relates to an increase in provision for impaired receivables in Express Gifts.

§ c.£3.0m to correct an area of previous non-compliance with IAS 39; and

§ c.£1.3m to reflect refinements made to estimation models used for receivables provisioning in light of changes to receivables collection processes over the last two years.

· New bank facilities agreed in November 2015 which run to December 2019 and are on much improved commercial terms

· David Sugden to step down as Executive Chairman at the upcoming Annual General Meeting with the search for a replacement well advanced

Current trading and Outlook

· Solid start to the new financial year, particularly from Express Gifts with underlying sales growth at Express Gifts at a healthy level in line with expectations. Conditions at Findel Education remain challenging

· Actions taken during FY16 to improve the two businesses are already producing improved performance

· Guidance for FY17 remains unchanged

David Sugden, Executive Chairman of Findel commented:

"In terms of financial performance, last year was more challenging than we expected. However, considerable progress has been made in strengthening the Group in a number of areas that will improve longer term prospects.

We now have a well-financed group focused solely on the growth of two core businesses - Express Gifts and Findel Education. We believe that this represents a turning point in the development of Findel, as, with the successful sale of Kitbag, we can now focus entirely on generating enhanced shareholder value from strong organic growth in our two core businesses.

With the progress made in the business fundamentals, together with the actions we have taken to address last year's profit performance, we are confident that we will return to profitable growth in the current and future years." 

Enquiries

Findel plc

David Sugden

Tim Kowalski

0161 303 3465

Tulchan Communications LLPStephen Malthouse / Will Smith020 7353 4200

Notes to Editors

The Findel group contains market leading businesses in the UK home shopping and education supplies markets. It is primarily a retailer and distributor, handling and supplying specialist products manufactured by third parties.

The Group's activities are focused in two main operating segments, together with a small overseas sourcing operation:

· Express Gifts - one of the largest direct mail order businesses in the UK; and

· Findel Education - the largest listed independent supplier of resources and equipment (excluding information technology and publishing) to schools in the UK.

CHAIRMAN'S STATEMENT

We are pleased to present this report on a year in which progress has been made in strengthening the Group in a number of areas that will considerably improve longer term prospects.

We now have a well-financed group focused solely on the growth of two core businesses - Express Gifts and Findel Education. We believe that this represents a turning point in the development of Findel, as we can now focus on generating enhanced shareholder value from strong organic growth in our two core businesses as opposed to being focused on restructuring.

Notwithstanding this progress, the financial performance in the year was challenging. Overall profit before tax* from continuing operations slipped from £27.7m in FY15 to £24.8m. Both of our core businesses contributed to this decline. This underlines the need for the prompt actions which we have taken and we are confident that these will improve our performance. A positive start to the current year supports our confidence.

Express Gifts

Express Gifts saw product sales for the year as a whole grow by 2.3% to £224.9m (FY15: £219.8m). Sales growth in the peak period from August to December was low by comparison with recent years at c.2%. In addition to a cautious approach to stock management, particularly for our newer ranges, which led to a lack of availability in the run up to Christmas, this was attributable to three main factors:

• The expansion of our clothing ranges led us to make significant changes to the way in which we promoted our Autumn catalogues. At the same time, and as reported at the half year, we carried out four times as many tests than in prior years to investigate the possibility of using this expanded clothing range to recruit new customers all year round. Whilst all of this activity impacted our autumn sales, it did give us valuable insights into effective new customer recruitment initiatives. As a result, we are now increasing the number of discounted promotions and our range of outstanding value products and taking advantage of broader advertising media, including television, to promote these and our value message. We are already seeing a positive response to our revised recruitment campaign. Our aim is to recruit 100,000 additional customers this year. Although we are only in the early stages of our campaign, we have already made good progress with the recruitment of 36,000 additional customers, in line with our plan.

• As part of our programme to monitor affordability in granting credit we had introduced constraints which were not believed to be optimised to provide the best outcome for our customers. These constraints had an adverse impact on product sales. We have addressed this through extensive trials that have enabled us to ensure a more appropriate level of affordability assessment in recent months, whilst ensuring fair customer outcomes, and this is already showing a positive effect on sales growth.

• In recent years our call centres have struggled to cope with demand during the peak sales period of the year and this has undoubtedly resulted in lost sales. To address this, we have invested in our own call centre operation in the Philippines which has recently been commissioned and will be fully operational for the coming peak season. This will give us much greater flexibility to cope with peak demand and improve our resilience in a more cost effective manner.

These actions have contributed to product sales in the new financial year to date that are strongly ahead of last year.

The impact of a fall in Sterling on the price of imports of product from the Far East was around £2m and a significant contributor to the reduction in the operating profit* for Express Gifts in the year.

The financial services activities performed strongly throughout the year, with improvements in the credit quality of the receivables book driving lower bad debt charges, lower default fees, higher interest income and a greater level of customer retention. Total revenue from financial services increased by 7.6% during the year to £88.1m. We continue to monitor the balance between maintaining tight underwriting standards and growing product sales closely to ensure the right outcome for customers. The business initiated a programme of risk-based pricing for its credit offer in November 2015, focussed initially on those established customers who present a higher than average level of risk. This programme will be rolled out to new customers in the coming months which should generate additional sustainable financial services revenue in FY17.

There continues to be a wide-ranging programme of development and investment within Express Gifts, aimed at improving the customers' experience and meeting their evolving expectations. This has included the recent launch of an updated website, which has improved the customer experience through enhanced navigation and search facilities, a fully responsive mobile platform as well as cross-sell and up-sell opportunities. The benefits of the updated website are already starting to be seen. Further upgrades to our core IT systems will follow in the next year to provide the flexibility for future technology improvements to be deployed more quickly and the move to a more digital future.

Our new financial services platform will also be available in summer 2017 to provide the basis for more tailored financial products for our customers. All of this investment is expected to increase order frequency and produce greater levels of customer retention in the coming years.

The management team in Express Gifts has been further strengthened during the year with the appointment of a Deputy Managing Director, who will focus initially on marketing, and a new IT Director with a digital focus. The ongoing process of management development has now seen significant strengthening of our capability in financial services, buying, marketing and IT.

Our application to the FCA for full authorisation of our consumer credit business was submitted in October 2015.

Findel Education

The past year has seen the new management team in Findel Education begin to tackle the root causes of the decline in sales and customer numbers which has resulted from an ongoing loss of market share.

The changes to the operating structure of the business, which have involved the integration if the teams responsible for each sales channel (our "Go To Market" strategy), have been implemented. These teams are reviewing every aspect of our offer to ensure that the products and the way that they are presented in our catalogues and online are relevant and attractive to their respective target customers. Our catalogue production processes are also being modernised to reduce costs but more importantly to make the process more flexible and enable our buyers to focus on improved buying processes. The best timing for each channel's main catalogue launch is also under review having undertaken tests on the main Classroom brand in recent months which have shown encouraging results. The objective is to achieve a stabilisation of sales in FY17.

The business has successfully managed product margins and operating costs during the year, which has mitigated the impact of the £8.4m sales decline to produce an operating profit* of £3.2m, only £1.0m below the £4.2m reported in FY15.

The merger of Findel Education's two warehouses is progressing very well and is on track to be completed by the end of the calendar year. This is expected to produce significant savings for the business of between £2-3m from FY18 onwards, which will represent a step-change in the profitability of this business and its ambition to achieve peer-comparable returns.

The business has also reviewed its digital offering recognising that currently on line orders are less than half the level enjoyed by our competitors. To address this, a new fully integrated website is being developed which will be launched during 2017 supported by enhanced online marketing tools.

Findel Education has continued to see challenging market conditions in the new financial year, with spending levels from schools remaining constrained. This is not expected to change in the near term. In response, the business is focused on increasing market share as well as seeking to exploit additional demand opportunities in such areas as furniture supplies.

Corporate Activity

During the year we have agreed new banking facilities providing a four year revolving credit facility and securitisation facilities on much improved normal commercial terms. This represents a significant milestone in the development of Findel.

Also during the year we achieved a successful sale of Kitbag to Fanatics, which completed in February. In addition to the total cash proceeds received of c.£14m this has enabled us to exit a business that has required considerable cash and management resources over many years.

Exceptional Items

Exceptional items for the continuing operations totalling £26.5m (FY15: £27.2m) were incurred during the year. The largest item related to customer redress and refunds for flawed financial services products estimated at £14.4m some of which has already been paid. The new financial services management team has been carrying out reviews of all products sold. This process is now complete. The number of products identified as requiring redress or refund is testimony to the work that was needed to improve standards in this business. Whilst the provisions for redress are estimates and therefore subject to change in the light of actual costs incurred, we believe the work that has been undertaken is at a point where all past sales of products requiring redress or refund have now been identified.

The changes introduced to receivables collection processes by Express Gifts over the last two years, including the introduction of a strategy to pursue the sale of significantly overdue receivables to third-parties, have enabled and required management to refine the estimation models used for receivables provisioning. In some areas, in particular in relation to customers with whom forbearance arrangements, both with and without interest, have been entered into, better information is now available to allow an improved, more accurate, assessment of the level of provision required. Based on this improved information, an additional provision of £4.3m has been recognised at March 2016, of which c.£3m relates to an adjustment to correct an area of previous non-compliance with IAS 39. We have concluded that the changes made would not, if they had been made during the prior year, have had a material impact on the comparative period income statement, as the level of provision at the beginning of 2014 would also have been similarly impacted. As a result, we consider it appropriate to recognise the additional £4.3m provision during 2016, although, since the increase in the provision of £4.3m does not relate to current year performance, this additional charge to the income statement has been classified as an exceptional item.

Exceptional charges totalling £5.6m were made in relation to the Findel Education warehouse merger, most of which represents the cash rental shortfall over the remaining 12 years of the warehouse lease in Enfield which will be vacated and is recorded as an onerous lease provision.

Dividends

The Board is continuing the work to restructure the Company balance sheet in order to create distributable reserves and enable the progress made in strengthening the financial position of the Group to be translated into the reinstatement of dividend payments. Further updates on progress in this area will be provided during the year.

Management and Board

In line with previous announcements it is my intention to step down as Chairman and leave the Board at the conclusion of the forthcoming Annual General Meeting. The search for a replacement is well advanced and we expect to make a further announcement in the near future. My six years on the Findel Board have seen the Company move from the brink of insolvency to a well-focused company with sound financing and excellent prospects. This has been particularly rewarding and I would like to personally pay tribute to and thank everyone, inside and outside of the Company, whose considerable efforts have made this possible.

Sandy Kinney Pritchard stepped down from the Board as a non-executive director in July 2015 and was replaced by Greg Ball who joined the Board in February 2016. Greg has significant experience of working in retail and regulated financial services from across his executive and non-executive career which will be of great value to the Group in the years ahead.

Employees

On behalf of the Board and the shareholders I would like to thank all of our employees for their substantial efforts in the last year. We continue to benefit from a workforce who show exceptional commitment to the development of the Group and the ongoing progress of the Group is substantially due to their efforts. I would also like to wish the employees of Kitbag well for the future under their new ownership.

Current trading

The early weeks of our financial year are relatively quiet trading periods for our businesses, but the Group has made a solid start to the year. Express Gifts has had a particularly encouraging start with the underlying rate of product sales well ahead of last year and comfortably in line with our expectations. The challenging market conditions for Findel Education noted above have led to a disappointing start to the year within its Schools brands, which has been partially offset by an encouraging performance from classroom brands and international sales.

A fuller update on trading will be given at our AGM.

Outlook

In terms of financial performance, last year was more challenging than we expected. It has however been a year of considerable progress in addressing the business fundamentals that will drive growth in sales and profits going forward. Whilst there is still more to do we are already seeing the benefits of these actions which gives us confidence that we will return to profitable growth in the current and future years.

David Sugden

Chairman

13 June 2016

 * before exceptional items

** overall net debt excluding the securitisation facility and finance leases

DIVISIONAL REVIEWS

EXPRESS GIFTS

We have seen a mixed performance from our largest business in the last year, which has illustrated the strengths of its model, but has also highlighted the need to improve a number of areas to maximise its longer-term prospects.

Business model and key trends

Express Gifts, our core credit-based home shopping business, is one of the largest direct mail order businesses in the UK offering its customers online and via catalogue, a broad range of home and leisure items, clothing, toys and gifts. As well as offering a number of exclusive products, including a variety of own-brand ranges, its comprehensive in-house personalisation facilities and focus on value supported by a flexible credit offer distinguish Express Gifts from other UK retailers.

Our business model is built on providing its customers with three key elements:

· Good value product

· Extensive personalisation

· Flexible Credit Offer

Our target customer

Express Gifts has c.1.4m active home shopping customers, predominantly women aged 30 upwards shopping for themselves or for their families. They are reached through an omni-channel marketing plan that includes the annual production and distribution of over 150 publications ranging from 6 to over 1,000 pages made available in both paper and electronic versions, together with press inserts, media advertising and television to support the recruitment of new customers.

An increasing range of good value product & choice

Over the last few years Express Gifts has invested significantly in its product margin to improve and deliver customer value and maintain its competitiveness. We continue to increase the choice we offer our customers which has included the introduction of plus-size clothing, lingerie and nightwear, kitchen, and health & beauty ranges to support our established categories. The range architecture "good, better, best" continues to evolve through extension of our own-branded ranges, supplemented by the increased use of aspirational premium brands.

The growth in the product range has resulted in an increase of average spend per customer from around £120 in FY12 to around £150 in FY16. Despite this, we still have a very small share of key markets such as clothing and consequently see significant opportunities to continue this positive trend for a number of years.

To continue to deliver a value proposition to our customers, we remain focussed on improving our sourcing strategies which includes supplier consolidation, and continued overseas sourcing through our own Far East sourcing office (Findel Asia Sourcing Ltd).

Express Gifts has continued to invest in its buying and merchandising capability during the year, to enhance the customer experience through the ability to offer a wider range of products and deliver improvements in gross margin in future periods.

Extensive personalisation

One of the key differences of the Express Gifts proposition is its ability to personalise a wide range of its goods, free of charge to customers. Our in-house facilities at our primary warehouse in Accrington, Lancashire provides personalisation for over 40% of customers each year, which is a key point of differentiation.

Flexible credit offer

The majority of Express Gifts' customers use a revolving account that operates in a similar fashion to a credit card. The customer is required to pay a relatively high minimum payment each month compared to similar offerings, but beyond that has the flexibility to pay the amount they choose including making full payment. Around half of all customers choose to spread their payments, with the average balance of c. £240 taking around 9 months to settle. Regular monthly statements ensure that customers can remain in control of their account, whilst also providing regular additional marketing opportunities.

Key challenges and issues

The business has seen a very strong recovery over the last five years, driven by medium-term growth in its customer base and retention rates, sustained increases in average spending levels, and a significant reduction in bad debt charges through the advances in behavioural credit scoring techniques and improved collections processes.

However, in the last year we have seen the rate of sales growth slowing and profits reducing, part of which was caused by the weakening of Sterling. These challenges are discussed below:

Credit limit assessments: The introduction of behavioural scoring techniques in 2013 has led to the reduction in bad debt as a percentage of revenue from 11.5% in FY13 to 5.2% in FY16. Those techniques, which are based on continuous reviews of internally-observed trends and customer behaviours, have been refined a number of times. We have also updated our upfront credit scorecards for new customers over the last two years to ensure that credit limits are only granted to customers who can demonstrate their ability to repay appropriately. These scorecards primarily rely upon external data to inform our decisions.

During FY16 we observed instances where both the upfront and behavioural scorecards were producing outcomes on credit limits that were significantly different to our expectations, and which had the effect of reducing the potential spending capacity of certain groups of customers. This led to a reduction in sales during the course of the last financial year. We have therefore made further refinements to the policies and will continue to monitor this closely to maintain an appropriate balance between growth and ensuring fair customer outcomes.

We saw positive signs of these actions in December 2015 where demand increased by 8% and in subsequent months.

Customer recruitment: 

With the expansion of our clothing ranges we were confident that we could start to recruit new customers cost-effectively throughout the year. To confirm our level of confidence we carried out four times as many tests compared to previous years. This high level of testing led to the recruitment of 5% fewer customers.

The extensive testing confirmed our confidence and identified effective recruitment vehicles and as a result we are now increasing our discounted promotions and our range of outstanding value products by using broader advertising media, including television, to promote our brand awareness and value message. We are already seeing a positive response to our revised recruitment campaign. Our plan is to recruit 100,000 additional customers this year, and although we are only in the early stages of our campaign we have already recruited 36,000 additional customers in line with our plans.

Continued focus on our core strategies

Technology improvements: April 2016 saw the launch of a new fully responsive e-commerce platform, enabling us to improve our promotional, personalisation and customer relevancy capabilities, which provides an enhanced user experience.

As we have previously stated we are well underway with implementing a new financial services platform that enables us to offer a greater range of financial products to meet our customer needs. We aim to implement this platform by Summer 2017, in time for our peak season.

Meeting customer expectations: In much the same way as customers are increasingly using digital tools to browse and order their goods, we are also seeing heightened expectations of levels of customer service, methods of communication, speed of response and ease of resolution. To ensure we support those demands we have invested in a new contact centre in the Philippines which will give us greater flexibility to manage demand, improve our business continuity capabilities, and reduce operational costs for both front and back office operations.

Management Team: We have strengthened the management with the appointment of a new Deputy Managing Director, who will focus initially on marketing, and a new IT Director to support and deliver our plans to accelerate a move away from existing mainframe technologies to more agile systems that enable us to continually meet the expectations of our customers.

2016 Performance

Product revenues for FY16 increased by 2.3% to £224.9m (FY15: £219.8m) as noted above. Since January, the level of underlying product sales growth has recovered to the levels we expect Express Gifts to be able to deliver over the medium term.

The financial services part of the business performed strongly throughout the year. The scorecard and operational changes made in the business delivered a further improvement in the credit quality of the receivables book driving lower bad debt charges, higher service charge income and a greater level of customer retention. Revenue from financial services increased by 7.6% during the year to £88.1m. The business initiated a programme of risk-based pricing for its credit offer in November 2015, focussed initially on those established customers who present a higher than average level of risk. This programme will be rolled out to new customers in the coming months which should generate additional sustainable financial services revenue in FY17. 

Bad debt as a percentage of revenue reduced to 5.2% (FY15: 8.1%). The changes to receivables collection processes introduced over the last two years by Express Gifts, including the sale of significantly overdue receivables to third-parties, have led to a need to refine the estimation models used for receivables provisioning. An exceptional impairment charge of £4.3m has been recorded in the current year relating to the impact of these changes as set out in the Finance Director's Report.

The business submitted its application for a full consumer credit licence from the Financial Conduct Authority in October 2015 on schedule. A substantial amount of work has been undertaken to improve the governance and effectiveness of controls and risk management within the business over the last year. Exceptional costs of some £0.8m were incurred in relation to this project during the current year.

We have continued to invest in our infrastructure and systems, and in the skills and capability of our teams to enable us to continually meet our customer expectations and ensure long-term growth of the business

The proportion of goods imported from the Far East increased once again, with the Group's own sourcing office playing an increased role in procuring products. However, the impact of a fall in Sterling on these imports during the year reduced operating profits by around £2m. The further reductions in Sterling seen since the start of the EU-Referendum campaign will cause a further deterioration in FY17.

As reported during the year, as part of its enhanced oversight work, the business has identified flaws in legacy products that require customers to be refunded. A provision of £14.4m has been taken within exceptional costs to cover this activity and the customer contact programmes are underway.

Overall, Express Gifts reported an operating profit* of £31.7m (FY15: £33.5m). After taking account of exceptional items, it reported an operating profit of £11.9m (FY15: £30.1m).

FINDEL EDUCATION

Market conditions continue to be challenging but Findel Education is on plan to deliver its transformational programme.

Business model and key trends

Our Educational Supplies division is one of the largest independent suppliers of school and early years resources (excluding IT, utilities and publishing) to primary, secondary and nursery educational establishments in the UK, with an estimated 7% market share (Source: BESA 2012) of the UK educational supplies market. The division's international business unit exports to English-speaking schools in over 120 countries worldwide.

Findel Education offers three distinct brand propositions: School, Classroom and Specialist. The main route to market is via printed catalogues and web based solutions, including multiple websites and e-procurement solutions. The School brands (GLS, A-Z and WNW) are primarily focussed on servicing the basic commodity needs of all educational establishments with products such as stationery, janitorial supplies, furniture and arts & crafts materials. The Classroom brands (Hope Education) focus on the supply of specialist curriculum and early years teaching aids to Primary School and Nurseries. The Specialist brands (Davies Sports, Philip Harris Scientific, and Learning Development Aids - LDA) are specialists in their respective fields and focus on both Primary and Secondary school establishments.

The Commercial business unit focuses on new business opportunities covering multiple academy groups (MAT's), LEA tenders, trade customers and key account customers.

Findel Education operates internationally and uses all of its product, brand strengths and market leading supply chain to support international schools in the delivery of their educational teaching requirements.

The business continues to maintain its strong relationship with Sainsbury's PLC, having successfully delivered their Active Kids programme for 11 years. The business was recently voted joint 1st in the annual Sainsbury's Marketing Supplier Performance Awards.

Key challenges and issues

The business has seen a decline in both sales and customer numbers which has resulted from a loss in market share over a number of years. Under the guidance of a new Chief Marketing Officer we have been working hard to rebuild and reorganise our key Marketing, Buying and Sales functions into brand business units, each of which is fully focused on the specific needs of the customers and the brands that they are purchasing from. There has been a significant investment of c.£1m in resourcing this area. The new teams are settling in well and starting to deliver a real step-change in the way that we drive the business units and their key growth objectives.

The School brands (GLS/A-Z/WNW) have had a more positive year from a rolling customer number perspective, coming from decline of 7.2% in FY15 to a net gain of 1.0% by the year end. However, this stabilisation of market share has been more than offset by reductions in the average spend per customer, particularly on larger value items such as furniture, which provides a good insight into the budget challenges schools are facing.

The Classroom brand (Hope) has experienced a more difficult year with a continued reduction in customer numbers. However, there are now signs of stabilisation to customer numbers and the overall demand position following the launch of a new 500-page test catalogue in January 2016. During the year we have rebuilt the Specialist teams and are starting to see good early signs of improvement in 2016. Scotland Excel has had a very strong year with 5.5% growth year on year.

We continue to perform well in the Academy sector with 10 commercial wins during the last 12 months. This has been achieved by our Commercial Business Unit, a team who are fully focused on new business opportunities in LEA tenders, Academy Groups and new business ventures. The general trend for state schools to move to Academy status is a good way for the business to gain market share and gives us a pipeline of opportunities that can be won on the back of building a strong Academy proposition.

Our International business has had a steady year with continued focus on developing a strategic platform that will drive growth in the future.

Our Business Transformation Plans are on plan for delivery

A new Leadership team has been put in place with the appointment of a new Chief Marketing Officer, Chief Information Officer and Operations Director. This team are delivering the key management qualities to successfully lead and transform the organisation. The team are fully focused on the delivery of the strategic plans for demand growth, digital capability and a simplified low cost IT system and distribution model.

We have invested over £6m in our major business IT systems and warehouse integration programme which is running well and is on plan. This investment will simplify the way we operate by moving onto just one core operating system and deliver c.£2-3m of cash and cost-saving benefit to the business in FY18. The project has delivered an automated picking and packing system in Nottingham that will be a market-leading distribution solution, bringing significant customer experience enhancements and a substantially increased order processing capacity.

The final brand will move after peak season with the Enfield distribution centre closing in December 2016.

The development and deployment of new technologies represents a key change programme for the business and during the year we have recruited a new Head of Digital and a new team who are fully focused on driving our web and e-procurement capabilities. We have successfully upgraded our existing websites during the year and have plans to significantly further enhance them over the next 12 months. We have also implemented our key e-procurement sites for the Scotland Excel contract. Recently we have launched our low level entry point procurement system to the market. This has been well received. Our overall digital revenues represent 16% of total sales which is well below our major competitors. It is clear that the education marketplace, whilst slower to adopt digital technology than consumer markets, is making increasing use of this channel. It is therefore a key priority for us to upgrade our capability in this area.

Customer experience continues to excel with a record net promoter score of 92%

Findel Education continues to deliver a 'Best in Class Customer Experience' across all areas and this is seen as a key attribute of the brands. The business has continued to build on the strong success delivered with a Net Promoter Score of 92% (FY15: 86%). We are now using external websites such as Feefo to gauge customer feedback on service and products; so far results have been very positive at between 96-97%.

2016 Performance and Progress

FY16 was a challenging year with overall sales down by 8.1% against the prior year. This was driven by a reduction in overall spend levels of School brand customers despite a stabilisation of its customer base and a continued reduction in the Classroom and Specialist brand customer base. As a business we have been realistic about the timescales to turn around the reducing customer and demand base and are encouraged by the key customer metric changes that we have seen in recent months. We have maintained a strong market share in London and the South-East by increasing our salesforce and marketing activities. Scotland had a very strong year with growth of +5.5%. Our Commercial sales team continued to grow key academy group relationships with 10 tender wins during the year and have a strong pipeline for the next 12 months.

The business has successfully managed product margins delivering a 140bps improvement in the gross profit margin and strong operating cost controls during the year which has mitigated the impact of the £8.4m sales decline to produce an operating profit* of £3.2m (FY15: £4.2m).

The completion of our system and warehouse integration project in the next few months is expected to deliver cash and net profit benefits of c.£2-3m to the business from FY18. The business has recognised exceptional charges totalling £5.6m relating to this project. After taking account of this, Findel Education reported an operating loss of £2.4m (FY15: loss of £19.5m).

In the short-term market conditions are expected to continue to present funding challenges for LEA state driven schools. A greater proportion of school budgets is expected to be allocated to areas such as staff costs and building costs, which in turn reduces the proportion available to be spent on consumables and resources. This has been felt across the educational resource supplier base during early 2016. The School Fair Funding formula which is due to be implemented during 2016 is a concern for our key London heartland with LEA's starting to plan for the reduction in budgets. Our ambition is to offset these pressures by regaining market share and growing customer numbers so as to achieve a stabilisation of revenue in the next 12 months. The business will also look to exploit opportunities in areas such as furniture supplies.

The long-term fundamentals for the education consumables and resources market remain attractive with the demographic trends showing increases in pupil numbers, this is particularly pronounced in GLS's stronghold of London and South-East, and in nursery and primary school aged children.

We are pleased with the progress being made and the Board is confident that this will deliver improved business performance and, despite continuing difficult market conditions, we still expect results in line with our expectations.

FINANCE DIRECTOR'S REVIEW

Group profit before tax

Group profit before tax* from continuing operations was £24.8m in FY16, down from £27.7m in FY15, as summarised below.

* before exceptional items

The operating profit* of the continuing operations of the Group reduced by £3.1m to £34.7m due to weaker performances in all three operating units as discussed earlier in the Strategic Report.

Discontinued operations

Kitbag

The trading performance of Kitbag in the period prior to its disposal was disappointing. Its revenues fell by around 5% with a number of its partner contracts underperforming leading to an operating loss for the period to disposal of £4.0m (FY15: £1.2m). A decision was taken in September 2015 to sell the business and therefore to treat the business as a discontinued operation. Kitbag was sold to a subsidiary of Fanatics Inc. on 1 February 2016 for initial consideration of £11.55m. Additional consideration of £2.3m in respect of working capital adjustments was received on 20 April 2016 bringing the total consideration for the business to £13.9m. The net loss on disposal of the business was £4.8m.

Exceptional items

Total exceptional items for the Group before tax totalling £31.9m (FY15: £47.3m) were incurred during the year.

Continuing operations

Exceptional items before tax for the continuing operations totalling £26.5m (FY15: £27.2m) were incurred during the year, of which the largest item related to customer redress and refunds for flawed financial services products estimated at £14.4m. The new management team brought in to our financial services business has been carrying out reviews of all products sold. This process is now complete. The number of products identified as requiring redress is testimony to the work that was needed to improve standards in this business. Whilst the provisions for redress are estimates and therefore subject to change in the light of actual costs incurred, we believe the work that has been undertaken is at a point where all past sales of products requiring redress have now been identified.

The changes introduced to receivables collection processes by Express Gifts over the last two years, including the introduction of a strategy to pursue the sale of significantly overdue receivables to third-parties, have enabled and required management to refine the estimation models used for receivables provisioning. In some areas, in particular in relation to customers with whom forbearance arrangements, both with and without interest, have been entered into, better information is now available to allow an improved, more accurate, assessment of the level of provision required. Based on this improved information, an additional provision of £4.3m has been recognised at March 2016, of which c.£3m relates to an adjustment to correct an area of previous non-compliance with IAS 39 (Financial Instruments). Management have concluded that the changes made would not, if they had been made during the prior year, have had a material impact on the comparative period income statement, as the level of provision at the beginning of 2014 would also have been similarly impacted. As a result, management consider it appropriate to recognise the additional £4.3m provision during 2016, although, since the increase in the provision of £4.3m does not relate to current year performance, this additional charge to the income statement has been classified as an exceptional item.

Exceptional charges totalling £5.6m were made in relation to the Findel Education warehouse merger, most of which represents the expected cash rental shortfall over the remaining 12 years of the warehouse lease in Enfield which will be vacated and is recorded as an onerous lease provision.

The successful refinancing of our bank and securitisation facilities in November 2015 for a four-year period to December 2019 means that the unamortised fees that were paid in respect of previous refinancing exercises in May 2014 and January 2015 totalling around £1.0m has been recognised as an exceptional finance charge.

Other exceptional charges totalling £1.2m have been recognised during the year.

Discontinued operations

In addition to the £4.8m loss on the disposal of Kitbag noted above, Kitbag also incurred exceptional restructuring costs of £0.3m prior to its disposal. A provision of £0.4m was also recorded in respect of a restructuring of the head-office as a result of the disposal of Kitbag.

Pensions

The Group has continued to make additional voluntary contributions to its defined benefit schemes totalling £2.5m in the current financial period (FY15: £4.1m) to improve the funding levels of these closed schemes. In accordance with the schedule of contributions agreed with the trustees in early 2014, £2.5m of contributions will be made in FY17, rising to £5.0m from FY18. The net deficit at the end of FY16 measured in accordance with IAS19 reduced to £2.3m (FY15: £11.5m) mainly as a result of gains in the year, reflecting an increase to the discount rate and a change to the mortality tables used to value the scheme's liabilities.

Taxation

The Group posted a credit of £0.1m in the year in respect of taxation for the continuing operations (FY15: £5.3m). The equivalent effective pre-exceptional tax rate for the year was 21.1% (FY15: 23.7%).

Earnings per share

The adjusted earnings per share for the year reduced from 24.81p in FY15 to 22.70p in FY16. The basic loss per share from continuing operations was 1.85p per share (FY15: loss per share of 5.63p).

Summary balance sheet

Consolidated net assets amounted to £78.9m at the period end (FY15: £82.7m), reflecting the net loss reported by the continuing operations and the loss on disposal of Kitbag offset by the actuarial gains in respect of the pension deficit. The net assets are equivalent to 91p per ordinary share (FY15: 96p per ordinary share).

Cash flow and borrowings

Net cash from operating activities was an outflow of £3.2m (FY15: inflow of £7.9m), reflecting the lower underlying profits of the business and the continued growth in Express Gifts' credit receivables. The proportion of net debt that supports those receivables increased from 82% to 84%.

 External net debt at the year-end was as follows:

The Group's bank facilities were refinanced in November 2015, with the new facility maturing in December 2019.

Dividends and capital structure

The directors have determined that no interim dividend will be paid (FY15: nil) and are not recommending the payment of a final dividend (FY15: nil).

The action taken during the period under review to cancel non-distributable reserves and reduce the nominal value of ordinary shares means that the Company has made good progress in reducing the deficit on its profit and loss account. The Company has not received any dividends from its subsidiaries and its balance sheet as at the end of March 2016 shows a deficiency of £33.2m on its retained reserves (FY15: deficiency of £156.4m). It is therefore not yet in a position to declare a dividend. The directors will provide further updates on dividend policy during the year.

Treasury and risk management

The Group's central treasury function seeks to reduce or eliminate exposure to foreign exchange, interest rate and other financial risks, to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. It does not engage in speculative transactions and transacts only in relation to underlying business requirements in accordance with approved policies.

Interest rate risk management

The Group's interest rate exposure is managed by the use of derivative arrangements as appropriate. The Group has purchased interest rate caps since the year-end covering the period from May 2016 to October 2017 to protect against the risk of unforeseen increases to LIBOR rates.

Net interest costs* for the year were £9.9m, slightly lower than the £10.1m from FY15, reflecting lower pension scheme interest and the lower borrowing margin achieved in Q4. This charge was covered 3.5 times by operating profit* (FY15: 3.7 times). As noted above, the successful refinancing of our bank and securitisation facilities in November 2015 for a four-year period to December 2019 means that the unamortised fees that were paid in respect of previous refinancing exercises in May 2014 and January 2015 totalling around £1.0m has been recognised as an exceptional finance charge.

Currency risk management

A significant proportion of the products sold, principally through the Group's Express Gifts division, are procured through the Group's Far East buying office and beyond. The currency of purchase for these goods is principally the US dollar, with a proportion being denominated in Hong Kong dollars.

At the balance sheet date, the Group had no outstanding forward contracts in place. However, the Group has recently amended its policy which until now has been to only cover exposures occurring within the current financial year. In keeping with sector peers, currency hedging will now be undertaken on a rolling 12-month basis, which will lead to period-end valuation gains/losses on future hedges being reported separately in the Group's Income Statement.

Borrowing risk

The Group's exposure to borrowing and cash investment risk is managed by dealing only with banks and financial institutions with strong credit ratings.

* before exceptional items

Findel plc

Group financial information

Consolidated Income Statement

52 week period ended 25 March 2016

The accompanying notes are an integral part of this consolidated income statement.

*Earnings before interest, taxation, depreciation and amortisation.

Consolidated Income Statement

52 week period ended 27 March 2015*

The accompanying notes are an integral part of this consolidated income statement.

*Restated to present the results of Kitbag Limited as a discontinued operation.

**Earnings before interest, taxation, depreciation and amortisation.

Consolidated Statement of Comprehensive Income

52 week period ended 25 March 2016

The total comprehensive loss for the period is attributable to the equity shareholders of the parent company Findel plc.

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

Consolidated Balance Sheet Company Number: 549034

at 25 March 2016

The accompanying notes are an integral part of this consolidated balance sheet.

Consolidated Cash Flow Statement

52 week period ended 25 March 2016

The accompanying notes are an integral part of this consolidated cash flow statement.

Consolidated Statement of Changes in Equity

52 week period ended 25 March 2016

The total equity is attributable to the equity shareholders of the parent company Findel plc.

Retained earnings at 25 March 2016 includes a special reserve in respect of the capital reduction exercise amounting to £15,447,000 which is not distributable (March 2015: not applicable).

The accompanying notes are an integral part of this consolidated statement of changes in equity.

Findel plc

Notes to the Group Financial Information

1 Basis of preparation of consolidated financial information

The financial information set out herein does not constitute the Company's statutory financial statements for the periods ended 25 March 2016 or 27 March 2015, but is derived from those financial statements. Statutory financial statements for 2015 have been delivered to the Registrar of Companies, and those for 2016 will be delivered in due course. The financial statements were approved by the Board of directors on 13 June 2016. The auditors have reported on those financial statements; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

Copies of the Company's statutory financial statements will be available on the Group's corporate website. Additional copies will be available upon request from Findel plc, 2 Gregory Street, Hyde, Cheshire, SK14 4TH.

The Group financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use within the European Union and in accordance with the accounting policies included in the Annual Report for the period ended 27 March 2015 except as stated below.

Impact of accounting standards not yet effective

The following Adopted IFRSs have been issued but have not been applied by the Group in the consolidated financial statements for the current period. Their adoption is not expected to have a material effect on the financial statements unless otherwise indicated:

· Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (effective date 31 December 2017) - Management is still considering the impact of this new standard.

· IFRS 15 Revenue from Contracts with Customers (effective date 31 December 2018) - Management is still considering the impact of this new standard.

· IFRS 9 Financial Instruments recognition and measurement - Replacing IAS 39 (effective date 31 December 2018) - Management is still considering the impact of this new standard and is as yet unable to quantify its likely impact.

· IFRS 16 Leases (effective date 31 December 2019) - Management is still considering the impact of this new standard and is as yet unable to quantify its likely impact.

Impact of accounting standards adopted

A number of amendments to IAS 19 Employee Benefits, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets became effective during the current period. These have therefore been adopted in the Group's consolidated financial statements in the current period. There is no impact on the consolidated financial statements in either the current or prior periods as a result of this adoption, other than certain disclosure requirements.

Exceptional items

As permitted by IAS1 'Presentation of financial statements', an item is disclosed separately if it is considered unusual by its nature and scale, and is of such significance that separate disclosure is required in the financial statements in order to fairly present the financial performance of the Group. Such items are referred to as exceptional items.

Discontinued operations

Kitbag Limited

The Group completed the disposal of its sports retail company, Kitbag Limited, on 1 February 2016. The business met the criteria to be accounted for as a discontinued operation as defined in IFRS 5, "Non-current assets held for sale and discontinued operations". Results from this discontinued operation have therefore been separated out in the consolidated income statement in both the current and prior periods to enhance the comparability of the ongoing businesses.

Kleeneze Limited

The Group completed the disposal of its network marketing company, Kleeneze Limited, in the prior period. Results from this discontinued operation until the point of completion have been separated out in the consolidated income statement to enhance the comparability of the ongoing businesses.

Going concern

In determining whether the Group's financial statements for the period ended 25 March 2016 can be prepared on a going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities in the current economic climate.

The directors have reviewed the trading and cash flow forecasts as part of their going concern assessment, including reasonable downside sensitivities which take into account the uncertainties in the current operating environment including amongst other matters demand for the Group's products, its available financing facilities, and regulatory licensing and compliance. Although at certain times the level of headroom reduces to a level which is less than the directors would regard as desirable in the long term, the directors believe it to be sufficient and have identified controllable mitigating actions that could be implemented if required. The Group's banking facilities were extended during the year and now mature in December 2019.

Taking into account the above uncertainties and circumstances, the directors formed a judgement that there is a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months.

Accordingly, they continue to adopt the going concern basis in preparing the Group's annual consolidated financial statements.

Key sources of estimation uncertainty

Express Gifts' trade receivables

Express Gifts' trade receivables are recognised on the balance sheet at original invoice amount less provision for impairment. At 25 March 2016 trade receivables with a gross value of £244.3m were recorded on the balance sheet less a provision for impairment of £43.1m. Provisions for impairment of receivables within Express Gifts are established when there is objective evidence that the Group will not be able to collect all amounts due and are based on estimated roll rates and collection rates at each year-end, as well as assumptions around the sale of significantly overdue receivables to third-parties. The roll rates, collection rates and assumptions around the sale of significantly overdue receivables are estimated based on historical and current trends and are inherently subjective.

The changes introduced to receivables collection processes by Express Gifts over the last two years, including the introduction of a strategy to pursue the sale of significantly overdue receivables to third-parties, have enabled and required management to refine the estimation models used for receivables provisioning. In some areas, in particular in relation to customers with whom forbearance arrangements, both with and without interest, have been entered into, better information is now available to allow an improved, more accurate, assessment of the level of provision required. Based on this improved information, an additional provision of £4.3m has been recognised at March 2016, of which c£3m relates to an adjustment to correct an area of previous non-compliance with IAS 39. Management have concluded that the changes made would not, if they had been made during the prior year, have had a material impact on the comparative period income statement, as the level of provision at the beginning of 2014 would also have been similarly impacted. As a result, management consider it appropriate to recognise the additional £4.3m provision during 2016, although, since the increase in the provision of £4.3m does not relate to current year performance, this additional charge to the income statement has been classified as an exceptional item.

2 Segmental analysis

*Restated to present the results of Kitbag as a discontinued operation.

3 Exceptional items

The following is an analysis of the exceptional items arising during the period.

The directors consider that all items recorded within exceptional items warrant separate presentation in the income statement in order to fairly reflect the underlying performance of the Group.

Restructuring costs in the current period of £2,347,000 (2015: £1,725,000), of which £698,000 (2015: £nil) related to discontinued operation(s), relate to management changes, redundancies and costs associated with the disposal of Kitbag Limited and the consolidation of Findel Education's warehousing operations from two sites to one, as well as organisational changes made within Express Gifts in relation to compliance with new FCA requirements.

In November 2015, the Group highlighted that Express Gifts had established that there was a flaw in legacy financial services products resulting in a provision of £2m being recorded to cover potential customer redress and refunds being recorded in the interim financial statements. This provision was made on the basis of information available at that time. Since then, further discussions have taken place with both the FCA and the product underwriter to establish the appropriate basis for redress and refunds. Based on the latest assumptions a provision of £14,388,000 has been recorded. It is possible that work being currently undertaken could result in more information becoming available which could lead management to revise this estimate. Any such changes would be accounted for as a revision to an accounting estimate and would be recognised in the period in which the estimate was revised.

A charge of £4,300,000 has been recorded in the current period in respect of receivables provisioning in Express Gifts. Please refer to note 1 for further details.

Costs of £367,000 have been recorded in respect of the write-off of amounts due to Express Gifts Limited from Findel plc's former subsidiary Kleeneze Limited, which have been assessed as irrecoverable.

Costs of £4,754,000 have been provided in the current period in respect of an onerous lease provision arising as a result of the consolidation of Findel Education's warehousing operations from two sites to one. The income statement charge is lower than the provision recorded due to the impact of the acceleration of a lease incentive, which was previously being released to the income statement of over the lifetime of the lease which expires in 2028.

A credit of £820,000 was recorded in the prior period in relation to the settlement of an historic VAT claim with HMRC.

A past service cost of service cost of £2,340,000 was recorded in the prior period in respect of additional liabilities arising from the equalisation of normal retirement ages for members in the Findel Education section of the Findel Group Pension Fund. This was partially offset by a settlement gain of £700,000 in respect of a Total Pension Increase Exchange ('TPIE') exercise carried out during the prior period.

Impairment of goodwill in the prior period related to a write down of goodwill allocated to the Findel Education cash generating unit ('CGU').

Following the refinancing of the Group's bank and securitisation facilities in the current period, costs of £998,000 (2014: £136,000) have been incurred in respect of the write-off of the unamortised fees that were paid in respect of previous refinancing exercises in May 2014 and January 2015.

Items specifically related to discontinued operations

A loss of £4,782,000 has been recorded in the current period in respect of the disposal of Kitbag Limited which competed on 1 February 2016. This loss includes a charge of £1,584,000 in respect of deferred tax assets written off as a result of the disposal.

In the prior period a gain of £641,000 was recorded in respect of the disposal of Kleeneze Limited, which completed on 24 March 2015.This gain included a credit of £2,404,000 in respect of deferred tax liabilities released as a result of the disposal.

A loss of £476,000 was recorded in the prior period in respect of the write down of stock held by Kleeneze immediately prior to its disposal.

In the prior period, impairment of other intangible assets related to a £19,045,000 write down of indefinite lived brand names allocated to Kleeneze CGU.

In the prior period, costs of £1,138,000, which included £485,000 in respect of impairment of property, plant and equipment, were incurred in relation to contracts in Kitbag Limited that had become loss making. Onerous lease costs of £114,000 were also recorded in this regard.

*Restated to present the results of Kitbag as a discontinued operation.

4 Discontinued operations

Kitbag Limited ('Kitbag')

The Group completed the disposal of its sports retail division through the sale of Kitbag and its subsidiaries on 1 February 2016 to Fanatics UK Holdings Ltd, a subsidiary of Fanatics Inc.

The gross consideration received was £13.9m, which comprised an initial payment of £11.6m payable on completion, as well as a further £2.3m received on 20 April 2016 following the agreement of completion accounts. This was dependent upon the level of working capital at completion. The cash proceeds were used to further reduce the Group's bank debt and to help drive further growth within the Group's core businesses, Express Gifts and Findel Education. 

A loss on disposal of £4.8m, representing the difference between the proceeds received net of costs of disposal, and the assets disposed of has been recorded within exceptional items. 

Kitbag's results for the period from 28 March 2015 to 1 February 2016 and for the period ended 27 March 2015 are reported separately within discontinued operation(s) and are summarised as follows:

*including exceptional charges of £698,000 (2015: £1,046,000) and a loss on disposal (including write-off of deferred tax assets of £1,584,000) of £4,782,000.

The major classes of assets and liabilities of Kitbag at disposal on 1 February 2016 and at 27 March 2015 were as follows:

The net cash flows from/(used in) Kitbag were as follows:

*includes proceeds (net of cash held in subsidiary) of £11,115,000.

Kleeneze Limited ('Kleeneze')

The Group completed the disposal of its network marketing company, Kleeneze, to Trillium Pond A.G. (a subsidiary of CVSL Inc.) on 24 March 2015 for gross consideration of £3.4m.

*including exceptional charges of £19,768,000 and a profit on disposal (including release of deferred tax liabilities of £2,404,000) of £641,000.

The major classes of assets and liabilities of Kleeneze at disposal on 24 March 2015 were as follows:

The net cash flows from/(used in) Kleeneze were as follows:

*includes proceeds (net of cash held in subsidiary) of £1,720,000.

5 Tax (income)/expense

(a) Tax (credited)/charged in the income statement

Tax (income)/expense from continuing operations excludes tax income in respect of the Group's discontinued operation(s) as follows:

*Relates to the write-off deferred tax assets on disposal of Kitbag Limited and is recorded within the loss on disposal of £4,782,000 recorded within exceptional items relating to discontinued operation.

**Includes a credit of £2,404,000 in respect of the release of deferred tax liabilities on the disposal of Kleeneze. This is recorded within the profit on disposal of £641,000 recorded within exceptional items relating to discontinued operations in the prior period.

α Restated to present the results of Kitbag Limited as a discontinued operation.

(b) Tax recognised directly in Equity

6 (Loss)/earnings per share

(Loss)/earnings per share figures for the period ended 27 March 2015 have been restated to reflect the presentation of the results of Kitbag Limited as a discontinued operation defined by IFRS 5 Non-current assets held for sale and discontinued operations.

* Adjusted to remove the impact of exceptional items.

The (loss)/earnings per share attributable to convertible ordinary shareholders is £nil.

7 Goodwill and other intangible assets

(a) Goodwill

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. After recognition of impairment losses, the carrying amount of goodwill has been allocated as follows:

The amount of goodwill that is tax deductible is £2,367,000 (2015: £2,367,000).

(b) Other intangible assets

Brand names, which arise from the acquisition of businesses, are deemed to have an indefinite life, and therefore are subject to annual impairment tests, on the basis that they are expected to be maintained indefinitely and are expected to continue to drive value for the Group.

The amortisation period for customer relationships, which arose from the acquisition of businesses, is between 2 and 20 years. Management do not consider that any customer relationships are individually material.

Brand names acquired in a business combination are allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. After recognition of impairment losses, the carrying amount of brand names has been allocated as follows:

(c) Impairment testing

The Group tests goodwill and indefinite lived brand names for impairment annually, or more frequently if there are indicators of impairment.

The recoverable amounts of the Express Gifts and Findel Education CGUs are determined from value in use calculations.

Significant judgements, assumptions and estimates

In determining the value in use of CGUs it is necessary to make a series of assumptions to estimate the present value of future cash flows. In each case, these key assumptions have been made by management reflecting past experience, current trends, and where applicable, are consistent with relevant external sources of information. The key assumptions are as follows:

Operating cash flows

Management has prepared cash flow forecasts for a three year period derived from the approved budget for financial year 2016/17. These forecasts include assumptions around sales prices and volumes, specific customer relationships and operating costs and working capital movements.

Risk adjusted discount rates

The pre-tax rates used to discount the forecast cash flows are between 12.0% and 15.0% (2015: 12.2% and 16.5%). These discount rates are derived from the Group's weighted average cost of capital as adjusted for the specific risks related to each CGU.

Long term growth rate

To forecast beyond the detailed cash flows into perpetuity, a long term average growth rate, which is not greater than the published International Monetary Fund average growth rate in gross domestic product for the next five year period in the territories where the CGUs operate has been used. The growth rate was assessed separately for each CGU however a rate of 2.1% (2015: 2.5%) has been deemed appropriate in both cases.

Results

The estimated recoverable amount of the Express Gifts and Findel Education CGUs exceed their carrying value by approximately £24,300,000 (2015: £19,500,000) and £6,700,000 (2015: impairment of £19,900,000 recorded) respectively and as such no impairment was necessary.

Sensitivity analysis

The results of the Group's impairment tests are dependent upon estimates and judgements made by management, particularly in relation to the key assumptions described above. A reasonably possible change in key assumptions could lead to the carrying value of the Findel Education CGU exceeding its recoverable amount. Sensitivity analysis to potential changes in operating cash flows and risk adjusted discount rates has therefore been reviewed.

The table below shows the risk adjusted discount rate and forecast operating cash flow assumptions used in the calculation of value in use for the Findel Education CGU and the amount by which each assumption must change in isolation in order for the estimated recoverable amount to equal the carrying value:

Based on the results of the impairment test for the Express Gifts CGU, management are satisfied that there is sufficient headroom such that a reasonably possible change in assumption would not lead to an impairment. Consequently, no sensitivity analysis has been disclosed.

8 Capital reduction

At the Annual General Meeting of the Company held on 30 July 2015, a special resolution was passed approving the cancellation of all amounts standing to the credit of the Company's share premium account and capital redemption reserve, along with the reduction of the nominal value of the ordinary share capital of the Company to 10 pence per ordinary share ("Capital Reduction"), subject to the approval of the Court. Court approval was obtained and following the subsequent registration of the Court order with the Registrar of Companies, the Capital Reduction became effective on 15 March 2016. 

The impact of the capital reduction on equity is summarised as follows:

Following the completion of the capital reduction, a special reserve of £15,447,000 has been created within retained earnings which is not distributable, in line with the Court order obtained.

9 Related parties

During the current and prior periods, the Company paid operating lease rentals to a company under the common control of one of the Group's major shareholders, Toscafund Asset Management LLP ("Toscafund") in respect of a building formerly utilised by the Group. The operating lease rentals paid to the associate of Toscafund in the current period in respect of this property were £135,000 (2015: £194,000). On 8 July 2015, the Group entered into an agreement with the associate of Toscafund to surrender the lease and paid a premium of £946,524 in this regard. No amounts (2015: £97,000) were accrued at the balance sheet date.

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not discussed in this note. All transactions and outstanding balances between the group companies are priced on an arms-length basis and are to be settled in the ordinary course of business.

Compensation of key management personnel

The remuneration of the directors including consultancy contracts and share-based payments, who are the key management of the Group is summarised below.

By order of the board

D A Sugden T J Kowalski

Chairman Finance Director

13 June 2016 13 June 2016

Principal risks and uncertainties