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two thousand & nine REPORT & ACCOUNTS


00 | MBL plc

We have a simplephilosophy. We deliver what customerswant, when they want it, and strive to make it easy for them.


contents

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_ 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_

ANNUAL REPORT & ACCOUNTS 2009 | 00

20 Independent auditors’ report to the members of MBL plc_


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We understand our customers’ consumers. We know what will makea good purchase.


chairman’s statement When I took over as Chairman in 2006 I stated that I was confident that the management team could deliver profitable growth of the Group. I am delighted to report a set of results that demonstrate the growth and sustained underlying profitability of the Group. We began the year with clarity over the focus of the Group, having completed the divestment of unprofitable and underperforming business units in 2007. The underperforming businesses were, for the most part, inherited by the current Board. Our distribution business strengthened its market position in the UK commencing supply to several new customers this year and, against a challenging market backdrop, I look forward to continuing with the progress achieved to date.

SUMMARY OF RESULTS In order to present a balanced view of the current year results it is important to recognise the impact of exceptional and nonrecurring charges on the results. These consisted of goodwill impairment charges of £12.4 million (2007: £2.2 million) and accelerated amortisation of other intangible assets of £nil (2007: £1.7 million). The table on page 9 illustrates the impact of the exceptional and non-recurring charges. Adjusted operating profit increased to £5.9 million (2007: £5.8 million). Operating profit decreased by £8.4 million due to the impairment of goodwill. An adjusted basic

ANNUAL REPORT & ACCOUNTS 2009 | 00

We have changed our financial statements to reporting under International Financial Reporting Standards and, as part of our annual impairment review, have reduced the carrying value of goodwill. Due to the size and nature of the reduction, this amount has been reflected as an exceptional item. The write down has no impact on the cash position of the Group.


earnings per share before exceptional items was 24.9p per share compared to 22.5p per share in 2007.

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Basic earnings per share was (47.5)p compared to (8.5)p in 2007. Adjusted basic earnings per share before exceptional items was 24.9 p per share compared to 22.5p per share in 2007. Revenue from continuing operations was £80.9 million compared to £61.5 million in 2007. This represents an increase of 31.5%. Sales in our distribution business grew by 49.3% from £48.5 million to £72.4 million while sales in our wholesale business fell by 36.4% from £12.9 million to £8.2 million. The growth in our distribution business, which is heavily weighted towards the supermarket sector, reflected strong performance in the sales of DVDs in addition to the achievement of several new customers. The contraction of our wholesale business continued as the remaining retailers in the music and film specialist sector continued to experience sales and margin pressure arising from the competitive efforts of supermarkets. Gross margins for the Group fell to 18.1% compared to 18.7% in 2007 (21.5% after adjusting from the accelerated amortisation of other intangible assets). Gross margins have been negatively impacted by the lowering of retail price points and a change in mix to higher value, lower margin products. Overheads continue to grow in line with the higher activity levels.

SHAREHOLDER VALUE AND DIVIDENDS As a result of its sustained underlying profitability, the Group has continued to generate significant cash. However, the cumulative exceptional charges associated with goodwill balances leave the Group with a significant deficit in distributable reserves which, if left unaddressed, will inhibit the

ability to pay dividends in the future. In order to rectify this anomaly, the Board is investigating ways in which the Group may be able to distribute cash to its shareholders. The Group expects to announce a proposal to restructure its share premium account and thereby position the Group with distributable reserves in due course. Should the measures the Directors are considering be successful, the Board will seek to embark on a progressive dividend policy.

DIRECTORATE After close to six years working with the Company, Alex Sorrell, Group Financial Director, has indicated his intention to take time out of the business to travel and pursue non work related interests. We would like to thank Alex for his contribution to the development of the business during his period of tenure and we also wish him well on his travels. Alex will leave the Board with immediate effect. It is intended that Lisa Clarke, the present Group Financial Controller, who has been with the Group since August 2006, will be appointed to Group Financial Director shortly and is currently acting as Group Financial Director Designate.

CURRENT TRADING AND OUTLOOK We have made a good start to the financial year and continue to strengthen our position in the markets in which we operate, despite difficult trading conditions in the retail sector in general, while margins remain at a similar level to last year. The economic climate continues to challenge us but we are optimistic that we will be in a position to report a good result for the interim period. Post year-end event.


On 28 February 2008 the Company announced that it was in discussions which may or may not lead to an offer being made for the Company. On 24 June 2008 the Company announced that talks regarding a possible offer for the Company have been discontinued.

Peter Cowgill Non-Executive Chairman 9 July 2008.

“ I am delighted to report a set of results that demonstrate the growth and sustained underlying profitability of the Group. Peter Cowgill Non-Executive Chairman

31 March 2007 £million Continuing activities

Turnover

80.9

61.5

Reported operating (loss)/prot

(6.5)

1.9

Adjustments: Goodwill impairment charge Accelerated amortisation of other intangible assets

12.4 —

2.2 1.7

5.9

5.8

Net interest

(0.2)

(0.4)

Reported (loss)/prot before tax Adjusted prot before tax

(6.7) 5.7

1.5 5.4

(47.5)p 72.4p

(8.5)p 31.0p

24.9p

22.5p

SUMMARY OF RESULTS

Adjusted operating prot

Basic EPS (pence) Exceptional and non-recurring charges (pence) Adjusted basic EPS (pence)

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31 March 2008 £million Continuing activities


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We are driven by ideas and by working with customers. Our aim is to help customers grow their sales.

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operating review DISTRIBUTION Music Box Leisure (‘MBL ’)

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MBL is central to the Group. MBL’s customers are exclusively in what the industry terms the ‘non traditional’ sector, for example supermarkets, discount retailers, motorway service stations and garden centres, rather than conventional high street CD and DVD shops. The emphasis with customers is on delivering strong sales and margins through targeted promotions. MBL has its own inhouse merchandising team which allows it to directly manage the quality of its customers’ in-store operations. It combines its customers’ sales data with strong buying skills to deliver good retail margins. The key focus of the year was to successfully integrate new customers into our existing business model and to strengthen our employee base in order to manage current growth. 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 heavily weighted towards the supermarket sector, which the management team believes offers good short to medium term prospects. MBL continues to be affected by the credit insurance industry’s lack of confidence in the sector. Credit limits from some of our key suppliers have been significantly reduced and we have secured product supply through discretionary uninsured trading limits supported by substantial advance payments on account.

WHOLESALE ESD Wholesale (‘ESD’) ESD is a wholesaler primarily to independent and internet retailers. The independent retail sector continues to experience a difficult time. As a supplier, ESD has experienced the problems associated with the credit insurers’

“ The added value we provide to customers in the nontraditional retail sector is our key point of difference compared to our competitors and consequently we achieve our best results by targeting this sector. Trevor Allan Chief Executive


views on the market which have resulted in reduced insurance cover available on customers. We operate on a low risk basis and seek to trade within insured limits. We had another year of significant bad debts and associated insurance claims, which has had a negative impact on our credit cover and insurance premiums for the coming year. Accordingly we continue to refuse certain sales opportunities due to lack of insurance cover. Early in the year we integrated the remaining profitable elements of our own label budget CD operation into ESD, comprising largely an export customer base. Overall sales in our wholesale business declined from ÂŁ12.9 million to ÂŁ8.2 million, the majority of the decline attributed to the fall in own label budget CDs primarily aimed at export markets. The focus in ESD has been to maintain profitability in the face of a declining domestic market. We have a small but very experienced team running ESD and it remains a low overhead operation that contributes incremental profit to the Group.

The Group’s customer base is heavily weighted in the UK supermarket sector, which accounts for approximately 80% of Group turnover. The added value we provide to customers in the non traditional retail sector is our key point of difference compared to our competitors and consequently we achieve our best results by targeting this sector. Our customers are retailers for whom profit margins, as a whole, are continually under pressure and this pressure is in turn placed on the suppliers. We use our buying skills to seek out profitable opportunities to mitigate the pressure on margins. Our buying strategy requires us to maintain a high stock level, although this is spread across a broad range of titles which mitigates the financial risk of specific product obsolescence. We seek to maintain a ready access to finance in order

The pervasive effects of the internet inevitably present risks and offer opportunities to the Group. Music represents less than 15% of our sales and because we are focused on mainstream product, not new chart releases, we do not feel the effects of music downloading as acutely as other distributors. The market for on-demand movie downloading remains in its infancy and has yet to have any discernible impact on our business. However, as a Board we are conscious that the market for distribution of media by physical product has a finite life and we continue to explore opportunities to enhance the long term future of the Group. We remain focused on providing our customers with exciting impulse purchase opportunities for the end customer. We continue to build our experience of distributing products direct to customers online, which have included selling via established third party websites. Although direct to customer sales currently represents a small minority of total sales, we are pleased to note that we processed over 85,000 orders directly with customers last year and we would expect that to grow further this year.

Trevor Allan Chief Executive 9 July 2008

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STRATEGY AND RISKS

that we may take advantage of inventory buying opportunities when they present themselves.


financial review INTERNATIONAL FINANCIAL REPORTING STANDARDS (‘IFRS’) These are our first full year results following the adoption of IFRS as adopted in the EU and they consequently include reconciliations from UK GAAP to IFRS. As shown in the reconciliation, the primary impacts of the transition to IFRS have been our treatment of goodwill, which is no longer subject to an annual amortisation, and our disclosure of discontinued operations, which are presented on a disaggregated basis. As a consequence of the annual review of impairment, an impairment charge of £12.4 million has been made and is classified as an exceptional write down of goodwill.

TURNOVER AND PROFITABILITY

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Sales for the year were £80.9 million (2007: £61.5 million). Operating profit, before exceptional items, was £5.889 million (2007: £5.755 million, before exceptional and non recurring charges). Net financing costs were £166,000 (2007: £425,000). Profit before tax and exceptional items was £5.723 million (2007: £5.330 million, before exceptional and non recurring charges). Earnings per share from continuing operations, before exceptional items, for the year were 24.9p per share (2007: 22.5p per share, before exceptional and non recurring charges). A summary of the sales and operating profit of the Group is shown in the table on page 15. Adjusted operating profit excludes the exceptional and nonrecurring charges totalling £12.4 million in 2008 and £3.9 million in 2007. Sales in our distribution business grew by 49.3% to £72.4 million. The growth in our distribution business, which is heavily weighted towards the supermarket sector, reflected strong performance in the sales of DVDs in addition to the introduction of


Total efficiency, from goods in to despatch to our customer. We have a flexible approach to getting the job done.


31 March 2008

Sales £million Activity Distribution Wholesale Other Central costs

31 March 2007

31 March 2008

31 March 2007

31March 2007

Operating Operating Operating Operating prot/(loss) prot/(loss) prot/(loss) prot/(loss) Sales reported adjusted reported adjusted £million % change £000s £000s £000s £000s

2008 adjusted versus 2007 adjusted % change

72.4 8.2 0.3

48.5 12.9 0.1

49.3 (36.4) 200.0

5,976 459 87 (13,056)

5,976 459 87 (633)

6,430 (215) (1,730) (2,537)

6,430 (215) (60) (400)

(7.1) (313.5) (245.0) (58.3)

80.9

61.5

31.5

(6,534)

(5,889)

1,948

5,755

2.3

several new customers. DVD sales represent approximately 78% of distribution sales in 2008 (versus 67% sales in 2007). Sales to new customers totalled £8.3 million in 2008. Sales in our wholesale business fell by 36.4% to £8.2 million. Export sales fell by approximately £2.1 million reflecting an overall decline in the low priced music sector. The contraction of our domestic wholesale business continued as the remaining retailers in the music and film specialist sector continued to experience sales and margin pressure arising from the competitive efforts of supermarkets.

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31 March 2008

Gross margins for the Group fell to 18.1% compared to 18.7% in 2007 (21.5% after adjusting from the accelerated amortisation of other intangible assets). Excluding intercompany trading, gross margins at our distribution business were 18.2% (2007: 23.4%). Gross margins in our distribution business have been negatively impacted by the lowering of retail price points and a change in mix to higher value, lower margin products. Gross margins at our wholesale business were 14.5% (2007: 13.4%), reflecting a change in product mix.

Operating profit from continuing operations, before exceptional items, was £5.9 million compared to £5.8 million before exceptional and non recurring charges in 2007.

CASH FLOW, WORKING CAPITAL AND BORROWING FACILITIES The Group generated £6.0 million cash from operations before movements in working capital (2007: £5.6 million). Working capital increased by £2.3 million, largely reflecting higher inventory balances and lower trade and related payables. Early in the second half of the year the distribution business noted that supplier credit insurance limits were cut significantly, which had a notable impact on the working capital position of the Group. The distribution business was forced to make advance payments in order to secure product supply, wherever possible negotiating early payment discounts. This position has continued throughout the second half and into the current trading period. Consequently our level of trade payables is not as high as our trading position and current stock position would indicate. The distribution business works closely with the principal


credit insurers; however, our suppliers remain largely unable to obtain adequate credit insurance cover. The Group repaid £2.9 million of borrowings in the year and ended the year with net cash of £1.7 million and no outstanding borrowings (2007: cash of £2.9 million and borrowings of £2.9 million). Due to its positive cash position, the distribution business has delayed the renewal of its sales finance facility. Although reinstatement of the facility will require credit approval from the Group’s bankers, the distribution business has received confirmation from the bank that they do not anticipate that the facility will not be credit approved.

TAXATION

Lisa Clarke

Group Financial Director Designate 9 July 2008

Sales for the year were £80.9 million (2007: £61.5 million). Operating profit, before exceptional items, was £5.889 million (2007: £5.755 million, before exceptional and non recurring charges). Lisa Clarke Group Financial Director Designate

” ANNUAL REPORT & ACCOUNTS 2009 | 00

The exceptional write-off of goodwill is not deductible for tax. The Group’s effective tax rate before goodwill write-offs was 25.4% compared to 26.4% in 2007. The 2008 tax charge benefitted from the adjustments in respect of prior years following the resolution of several outstanding matters. The 2007 tax charge benefitted from tax relief on losses from discontinued operations. Under existing tax legislation it is anticipated that the Group’s effective tax rate will be marginally above the main UK Corporation Tax rate in future years.


00 | MBL plc

We are passionate about looking after our customers. We respond in the way they need us to.


ANNUAL REPORT & ACCOUNTS 2009 | 00


operational team

Lisa Clarke, Financial Director

Katie Burke, HR Ofcer

James Allan, Buying Controller

Rob Sharp, Supply Chain Controller

James Allan, Buying Controller

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Alan Bellis, Operations Director


directors’ report The Directors present their Annual Report and audited financial statements for the year ended 31 March 2008.

PRINCIPAL ACTIVITIES AND BUSINESS REVIEW The principal activities of the Group throughout the year were the distribution and licensing of audio, visual and other media products. The results for the year and the financial position were considered pleasing by the Directors. A review of the business of the Group for the financial year is detailed as follows: Chairman’s Statement Operating Review Financial Review

(pages 10 to 11) (pages 12 to 13) (pages 14 to 15)

RESULTS Revenue for the year ended 31 March 2008 was £80.9 million and loss before tax was £6.7 million compared to £61.5 million and a profit of £1.5 million in the previous financial year. The Consolidated Income Statement is set out on page 21.

DIVIDEND The Directors do not propose the payment of a dividend (2007: £nil).

DIRECTORS

The Director retiring by rotation at the next Annual General Meeting is T.S. Allan and, being eligible, offers himself for re-election.

DIRECTORS’ INTERESTS The interests of the Directors who held office at 31 March 2008 are shown below:

P. A. Cowgill S.Allan A. F. Sorrell

Ordinary Shares of 75p each 31 March 2008

Ordinary Shares of 75p each 31 March 2007

200,000 4,520,399 366,915

200,000 4,520,399 366,915

5,087,314

5,087,314

There has been no change in Directors’ interests since the year end.

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The Directors who held office during the year were as follows: P. A. Cowgill T. S. Allan A. F. Sorrell


Unit 9 Enterprise Court, Lancashire Enterprise Business Park, Centurion Way, Leyland, Lancashire, PR26 6TZ Tel: +44 (0) 1772 455000 Fax: +44 (0) 1772 331199 Email: enquires@airmusicandmedia.com www.airmusicandmedia.com


MBL Visual