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two thousand& nineREPORT & ACCOUNTS
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We have a simplephilosophy.We deliver what customerswant,when they want it, and strive to make it easy for them.
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02 Summary of result_
04 Chairman’s statement_
07 Operating review_
08 Financial review_
10 Operational team_
12 Directors’ report_
14 Statement of directors’ responsibilities in respect of
01 the directors’ report and the financial statements_
20 Independent auditors’ report to the members of MBL plc_
23 Consolidated income statement_
24 Consolidated statement of recognised income and expense_
29 Consolidated balance sheet_
34 Consolidated cash flow statements_
40 Notes to the consolidated financial statements_
42 Company balance sheet_
43 Notes to the company financial statements_
44 Notice of annual general meeting_
50 Form of proxy_
contents
We understand our customers’ consumers.We know what will makea good purchase.
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chairman’s statementWhen I took over as Chairman in 2006 Istated that I was confident that themanagement team could deliver profitablegrowth of the Group. I am delighted to reporta set of results that demonstrate the growthand sustained underlying profitability of theGroup. We began the year with clarity overthe focus of the Group, having completed thedivestment of unprofitable andunderperforming business units in 2007.
The underperforming businesses were, for themost part, inherited by the current Board.Our distribution business strengthened itsmarket position in the UK commencing supplyto several new customers this year and,against a challenging market backdrop, I lookforward to continuing with the progressachieved to date.
We have changed our financial statements toreporting under International FinancialReporting Standards and, as part of ourannual impairment review, have reduced thecarrying value of goodwill. Due to the sizeand nature of the reduction, this amount hasbeen reflected as an exceptional item. Thewrite down has no impact on the cashposition of the Group.
SUMMARY OF RESULTSIn order to present a balanced view of thecurrent year results it is important torecognise the impact of exceptional and non-recurring charges on the results. Theseconsisted of goodwill impairment charges of£12.4 million (2007: £2.2 million) andaccelerated amortisation of other intangibleassets of £nil (2007: £1.7 million). The tableon page 9 illustrates the impact of theexceptional and non-recurring charges.Adjusted operating profit increased to £5.9million (2007: £5.8 million). Operating profitdecreased by £8.4 million due to theimpairment of goodwill. An adjusted basic
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earnings per share before exceptional itemswas 24.9p per share compared to 22.5p pershare in 2007.
Basic earnings per share was (47.5)pcompared to (8.5)p in 2007. Adjusted basicearnings per share before exceptional itemswas 24.9 p per share compared to 22.5p pershare in 2007. Revenue from continuingoperations was £80.9 million compared to£61.5 million in 2007. This represents anincrease of 31.5%. Sales in our distributionbusiness grew by 49.3% from £48.5 millionto £72.4 million while sales in our wholesalebusiness fell by 36.4% from £12.9 million to£8.2 million. The growth in our distributionbusiness, which is heavily weighted towardsthe supermarket sector, reflected strongperformance in the sales of DVDs in additionto the achievement of several new customers.
The contraction of our wholesale businesscontinued as the remaining retailers in themusic and film specialist sector continued toexperience sales and margin pressure arisingfrom the competitive efforts of supermarkets.Gross margins for the Group fell to 18.1%compared to 18.7% in 2007 (21.5% afteradjusting from the accelerated amortisationof other intangible assets). Gross marginshave been negatively impacted by thelowering of retail price points and a change inmix to higher value, lower margin products.Overheads continue to grow in line with thehigher activity levels.
SHAREHOLDER VALUE ANDDIVIDENDSAs a result of its sustained underlyingprofitability, the Group has continued togenerate significant cash. However, thecumulative exceptional charges associatedwith goodwill balances leave the Group with asignificant deficit in distributable reserveswhich, if left unaddressed, will inhibit the
ability to pay dividends in the future. In orderto rectify this anomaly, the Board isinvestigating ways in which the Group may beable to distribute cash to its shareholders.The Group expects to announce a proposal torestructure its share premium account andthereby position the Group with distributablereserves in due course. Should the measuresthe Directors are considering be successful,the Board will seek to embark on aprogressive dividend policy.
DIRECTORATEAfter close to six years working with theCompany, Alex Sorrell, Group FinancialDirector, has indicated his intention to taketime out of the business to travel and pursuenon work related interests. We would like tothank Alex for his contribution to thedevelopment of the business during his periodof tenure and we also wish him well on histravels. Alex will leave the Board withimmediate effect.
It is intended that Lisa Clarke, the presentGroup Financial Controller, who has been withthe Group since August 2006, will beappointed to Group Financial Director shortlyand is currently acting as Group FinancialDirector Designate.
CURRENT TRADING ANDOUTLOOKWe have made a good start to the financialyear and continue to strengthen our positionin the markets in which we operate, despitedifficult trading conditions in the retail sectorin general, while margins remain at a similarlevel to last year. The economic climatecontinues to challenge us but we areoptimistic that we will be in a position toreport a good result for the interim period.Post year-end event.
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On 28 February 2008 the Companyannounced that it was in discussions whichmay or may not lead to an offer being madefor the Company. On 24 June 2008 theCompany announced that talks regarding apossible offer for the Company have beendiscontinued.
Peter Cowgill Non-Executive Chairman9 July 2008.
Turnover
Reported operating (loss)/prot
Adjustments: Goodwill impairment charge Accelerated amortisation of other intangible assets
Adjusted operating prot
Net interest
Reported (loss)/prot before tax Adjusted prot before tax
Basic EPS (pence) Exceptional and non-recurring charges (pence)
Adjusted basic EPS (pence)
31 March2008
£millionContinuing
activities
80.9
(6.5)
12.4 —
5.9
(0.2)
(6.7) 5.7
(47.5)p72.4p
24.9p
31 March2007
£millionContinuing
activities
61.5
1.9
2.21.7
5.8
(0.4)
1.55.4
(8.5)p31.0p
22.5p
SUMMARY OF RESULTS
I am delighted to report a setof results that demonstratethe growth and sustainedunderlying profitability of theGroup.
Peter CowgillNon-Executive Chairman
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We are driven byideas and by working
with customers.Our aim is to help customers
grow their sales.
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operating review
DISTRIBUTIONMusic Box Leisure (‘MBL ’)MBL is central to the Group. MBL’s customersare exclusively in what the industry terms the‘non traditional’ sector, for examplesupermarkets, discount retailers, motorwayservice stations and garden centres, ratherthan conventional high street CD and DVDshops. The emphasis with customers is ondelivering strong sales and margins throughtargeted promotions. MBL has its own in-house merchandising team which allows it todirectly manage the quality of its customers’in-store operations. It combines its customers’sales data with strong buying skills to delivergood retail margins.
The key focus of the year was to successfullyintegrate new customers into our existingbusiness model and to strengthen ouremployee base in order to manage currentgrowth. Sales at MBL grew by 49.3% from£48.5 million to £72.4 million. Of this growth,£8.3 million was attributed to new customers.The customer base in MBL remains heavilyweighted towards the supermarket sector,which the management team believes offersgood short to medium term prospects. MBLcontinues to be affected by the creditinsurance industry’s lack of confidence in thesector. Credit limits from some of our keysuppliers have been significantly reduced andwe have secured product supply throughdiscretionary uninsured trading limitssupported by substantial advance paymentson account.
WHOLESALEESD Wholesale (‘ESD’)ESD is a wholesaler primarily to independentand internet retailers. The independent retailsector continues to experience a difficulttime. As a supplier, ESD has experienced theproblems associated with the credit insurers’
The added value we provideto customers in the non-traditional retail sector is ourkey point of differencecompared to ourcompetitors and consequentlywe achieve our best results bytargeting this sector.
Trevor AllanChief Executive
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views on the market which have resulted inreduced insurance cover available oncustomers. We operate on a low risk basisand seek to trade within insured limits. Wehad another year of significant bad debts andassociated insurance claims, which has had anegative impact on our credit cover andinsurance premiums for the coming year.Accordingly we continue to refuse certainsales opportunities due to lack of insurancecover. Early in the year we integrated theremaining profitable elements of our ownlabel budget CD operation into ESD,comprising largely an export customer base.Overall sales in our wholesale businessdeclined from £12.9 million to £8.2 million,the majority of the decline attributed to thefall in own label budget CDs primarily aimedat export markets. The focus in ESD has beento maintain profitability in the face of adeclining domestic market. We have a smallbut very experienced team running ESD andit remains a low overhead operation thatcontributes incremental profit to the Group.
STRATEGY AND RISKSThe Group’s customer base is heavilyweighted in the UK supermarket sector, whichaccounts for approximately 80% of Groupturnover. The added value we provide tocustomers in the non traditional retail sectoris our key point of difference compared to ourcompetitors and consequently we achieve ourbest results by targeting this sector. Ourcustomers are retailers for whom profitmargins, as a whole, are continually underpressure and this pressure is in turn placed onthe suppliers. We use our buying skills to seekout profitable opportunities to mitigate thepressure on margins. Our buying strategyrequires us to maintain a high stock level,although this is spread across a broad rangeof titles which mitigates the financial risk ofspecific product obsolescence. We seek tomaintain a ready access to finance in order
that we may take advantage of inventorybuying opportunities when they presentthemselves.
The pervasive effects of the internet inevitablypresent risks and offer opportunities to theGroup. Music represents less than 15% of oursales and because we are focused onmainstream product, not new chart releases,we do not feel the effects of musicdownloading as acutely as other distributors.The market for on-demand moviedownloading remains in its infancy and hasyet to have any discernible impact on ourbusiness. However, as a Board we areconscious that the market for distribution ofmedia by physical product has a finite life andwe continue to explore opportunities toenhance the long term future of the Group.
We remain focused on providing ourcustomers with exciting impulse purchaseopportunities for the end customer. Wecontinue to build our experience ofdistributing products direct to customers on-line, which have included selling viaestablished third party websites. Althoughdirect to customer sales currently representsa small minority of total sales, we are pleasedto note that we processed over 85,000orders directly with customers last year andwe would expect that to grow further thisyear.
Trevor AllanChief Executive9 July 2008
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financial review
INTERNATIONAL FINANCIALREPORTING STANDARDS (‘IFRS’)These are our first full year results followingthe adoption of IFRS as adopted in the EUand they consequently include reconciliationsfrom UK GAAP to IFRS. As shown in thereconciliation, the primary impacts of thetransition to IFRS have been our treatment ofgoodwill, which is no longer subject to anannual amortisation, and our disclosure ofdiscontinued operations, which are presentedon a disaggregated basis. As a consequenceof the annual review of impairment, animpairment charge of £12.4 million has beenmade and is classified as an exceptional writedown of goodwill.
TURNOVER AND PROFITABILITYSales for the year were £80.9 million (2007:£61.5 million). Operating profit, beforeexceptional items, was £5.889 million (2007:£5.755 million, before exceptional and nonrecurring charges). Net financing costs were£166,000 (2007: £425,000). Profit beforetax and exceptional items was £5.723 million(2007: £5.330 million, before exceptional andnon recurring charges). Earnings per sharefrom continuing operations, before exceptionalitems, for the year were 24.9p per share(2007: 22.5p per share, before exceptionaland non recurring charges).
A summary of the sales and operating profitof the Group is shown in the table on page15. Adjusted operating profit excludes theexceptional and nonrecurring charges totalling£12.4 million in 2008 and £3.9 million in2007.Sales in our distribution business grew by49.3% to £72.4 million. The growth in ourdistribution business, which is heavilyweighted towards the supermarket sector,reflected strong performance in the sales ofDVDs in addition to the introduction of
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Total efficiency, fromgoods in to despatch
to our customer.We have a flexible approach
to getting the job done.
ActivityDistributionWholesaleOtherCentral costs
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several new customers. DVD sales representapproximately 78% of distribution sales in2008 (versus 67% sales in 2007). Sales tonew customers totalled £8.3 million in 2008.Sales in our wholesale business fell by 36.4%to £8.2 million. Export sales fell byapproximately £2.1 million reflecting an overalldecline in the low priced music sector. Thecontraction of our domestic wholesalebusiness continued as the remaining retailersin the music and film specialist sectorcontinued to experience sales and marginpressure arising from the competitive effortsof supermarkets.
Gross margins for the Group fell to 18.1%compared to 18.7% in 2007 (21.5% afteradjusting from the accelerated amortisationof other intangible assets). Excludingintercompany trading, gross margins at ourdistribution business were 18.2% (2007:23.4%). Gross margins in our distributionbusiness have been negatively impacted bythe lowering of retail price points and achange in mix to higher value, lower marginproducts. Gross margins at our wholesalebusiness were 14.5% (2007: 13.4%),reflecting a change in product mix.
Operating profit from continuing operations,before exceptional items, was £5.9 millioncompared to £5.8 million before exceptionaland non recurring charges in 2007.
CASH FLOW, WORKING CAPITALAND BORROWING FACILITIESThe Group generated £6.0 million cash fromoperations before movements in workingcapital (2007: £5.6 million). Working capitalincreased by £2.3 million, largely reflectinghigher inventory balances and lower tradeand related payables. Early in the second halfof the year the distribution business notedthat supplier credit insurance limits were cutsignificantly, which had a notable impact onthe working capital position of the Group. Thedistribution business was forced to makeadvance payments in order to secure productsupply, wherever possible negotiating earlypayment discounts. This position hascontinued throughout the second half andinto the current trading period. Consequentlyour level of trade payables is not as high asour trading position and current stockposition would indicate. The distributionbusiness works closely with the principal
31 March2008
Sales£million
72.48.20.3
80.9
31 March2007
Sales£million
48.5 12.90.1
61.5
% change
49.3(36.4)200.0
31.5
31 March2008
Operatingprot/(loss)
reported £000s
5,976 459
87 (13,056)
(6,534)
31 March2008
Operatingprot/(loss)
adjusted £000s
5,976 459
87(633)
(5,889)
31 March2007
Operatingprot/(loss)
reported £000s
6,430 (215)
(1,730) (2,537)
1,948
31March2007
Operatingprot/(loss)
adjusted£000s
6,430(215)(60)
(400)
5,755
2008adjusted
versus 2007
adjusted % change
(7.1)(313.5)
(245.0) (58.3)
2.3
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credit insurers; however, our suppliers remainlargely unable to obtain adequate creditinsurance cover. The Group repaid £2.9 millionof borrowings in the year and ended the yearwith net cash of £1.7 million and nooutstanding borrowings (2007: cash of £2.9million and borrowings of £2.9 million). Due toits positive cash position, the distributionbusiness has delayed the renewal of its salesfinance facility. Although reinstatement of thefacility will require credit approval from theGroup’s bankers, the distribution business hasreceived confirmation from the bank thatthey do not anticipate that the facility will notbe credit approved.
TAXATIONThe exceptional write-off of goodwill is notdeductible for tax. The Group’s effective taxrate before goodwill write-offs was 25.4%compared to 26.4% in 2007. The 2008 taxcharge benefitted from the adjustments inrespect of prior years following the resolutionof several outstanding matters. The 2007 taxcharge benefitted from tax relief on lossesfrom discontinued operations. Under existingtax legislation it is anticipated that theGroup’s effective tax rate will be marginallyabove the main UK Corporation Tax rate infuture years.
Lisa ClarkeGroup Financial Director Designate9 July 2008
Sales for the year were £80.9million (2007: £61.5 million).Operating profit, beforeexceptional items, was £5.889million (2007: £5.755 million,before exceptional and nonrecurring charges).
Lisa ClarkeGroup Financial Director Designate
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We are passionate about looking after our customers.We respond in the way theyneed us to.
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Lisa Clarke, Financial Director
Alan Bellis,Operations Director
James Allan, Buying Controller
Katie Burke,HR Of cer
James Allan, Buying Controller
Rob Sharp, Supply Chain Controller
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operational team
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directors’ report
P. A. Cowgill S.AllanA. F. Sorrell
Ordinary Sharesof 75p each
31 March 2008
200,0004,520,399
366,915
5,087,314
Ordinary Sharesof 75p each
31 March 2007
200,0004,520,399
366,915
5,087,314
The Directors present their Annual Report and audited financial statements for the year ended31 March 2008.
PRINCIPAL ACTIVITIES AND BUSINESS REVIEWThe principal activities of the Group throughout the year were the distribution and licensing ofaudio, visual and other media products. The results for the year and the financial position wereconsidered pleasing by the Directors. A review of the business of the Group for the financialyear is detailed as follows:
Chairman’s Statement (pages 10 to 11)Operating Review (pages 12 to 13)Financial Review (pages 14 to 15)
RESULTSRevenue for the year ended 31 March 2008 was £80.9 million and loss before tax was £6.7million compared to £61.5 million and a profit of £1.5 million in the previous financial year. TheConsolidated Income Statement is set out on page 21.
DIVIDENDThe Directors do not propose the payment of a dividend (2007: £nil).
DIRECTORSThe Directors who held office during the year were as follows:P. A. CowgillT. S. AllanA. F. Sorrell
The Director retiring by rotation at the next Annual General Meeting is T.S. Allan and, beingeligible, offers himself for re-election.
DIRECTORS’ INTERESTSThe interests of the Directors who held office at 31 March 2008 are shown below:
There has been no change in Directors’ interests since the year end.
Unit 9 Enterprise Court, Lancashire Enterprise BusinessPark, Centurion Way, Leyland, Lancashire, PR26 6TZTel: +44 (0) 1772 455000Fax: +44 (0) 1772 331199Email: [email protected]
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