Transcription

1 CONTENTS Chairman s Statement 2 Directors Biographies 6 Directors Report and Business Review 7 Corporate Governance Statement 11 Directors Remuneration Report 15 Independent Auditors Report 18 Consolidated Profit and Loss Account 20 Statement of Total Recognised Gains and Losses 21 Consolidated Balance Sheet 22 Parent Company Balance Sheet 23 Consolidated Cash Flow Statement 24 Notes to the Accounts 25 Notice of Annual General Meeting 43 Form of Proxy DIRECTORS AND ADVISERS Directors Registered office Nominated Advisers and Broker Registrars R King 5th Floor Charles Stanley Securities Neville Registrars Limited K P Shah 4 Chiswell Street 25 Luke Street Neville House J J Diver London EC1Y 4UP London EC2A 4AR 18 Laurel Lane J J P Kissane Halesowen I S Fenn Solicitors West Midlands B63 3DA Lord Birdwood Duane Morris D Harris 5 th Floor Bankers A B MacKay 4 Chiswell Street National Westminster Bank plc London EC1Y 4UP Standard Chartered Bank Secretary K P Shah FCCA Company registration number Auditors HLB Vantis Audit plc 82 St John Street London EC1M 4JN The Character Group plc annual report and accounts for the year ended 31 August

2 CHAIRMAN S STATEMENT Introduction I am delighted to report record pre-tax profits of million for the financial year ended 31 August 2007, compared to 5.1 million for the previous year. Basic earnings per share in the period were pence, up 115% from 8.36 pence achieved for the continuing business in the comparable period (2006: 5.80 pence). Since the disposal of our digital business in February 2006, we have been able to concentrate virtually all our efforts on developing our toys and games portfolio. This, together with our strategy of acquiring new product licences and designing and developing products in-house, has proven to be a major factor in the Group s growth. This creditable performance not only reflects this focus but shows that our products continue to meet the market s needs and consumer demand. Financials The 2006/7 financial year is our first financial year where we have been able to focus fully on our continuing business following the sale of our digital business, although the comparative figures shown include revenue and contribution from the historical digital operation. (Note 2 compares the continuing business). Turnover for Toys, Games and Gifts was million against million last year, an increase of approximately 36 per cent (2006: million, including digital sales of million). Stocks at year end were million (2006: million, including digital stocks). Cash at bank at the year end was 15.7 million, compared to 7.4 million at 31 August Review of 2006/7 Through the team effort of our senior management, we entered the year with a determination to concentrate our efforts on developing the "brands" that we had in the business, whilst at the same time ensuring that our products got the distribution base they deserved. Our growth to date in sales and profits reflects an outstanding performance for the Group, especially as we continue to operate in a difficult period for retailers, both in the UK and across Europe. Our Doctor Who product line-up performed exceptionally well once again. As Master Toy licensee, we celebrated another phenomenal year, with over 3 million Doctor Who action figures projected to be sold through calendar year 2007 compared to 1.7 million for the previous year. Operating profit for the continuing business increased by approximately 74% to million (2006: 6.91 million). Profit before tax rose approximately 130% to million (2006: 5.13 million). It is also satisfying to note that we experienced strong double digit growth in many of our other brands, including Scooby Doo, Disney Princess, Peppa Pig, Gr8 Art, Bindeez, Dragonfly (from our Robotic range) and Gloe Bears. 2 The Character Group plc annual report and accounts for the year ended 31 August 2007

3 CHAIRMAN S STATEMENT CONTINUED Overall, the growth that we have achieved has enabled us to increase our UK market share by approximately 30%. During the year, we secured a number of new Master Toy licences, including: Primeval An Impossible Pictures production for ITV, ProSieben and M6, is a science fiction drama, which has been renewed for a second series and Character will be producing an extensive line of exciting products that will include a Dragonfly Rex and Carnivorous Pterosaur. These will be available from this month and will be followed by a number of other action figures and creatures from series one and two in January Dork Hunters From Outer Space The Pan-European licence covers all standard master toy products, such as basic plush; feature plush; action figures; toy vehicles and accessories; playsets; activity, arts & crafts; interactive toys; boardgames; toy writing and school instruments and toy accessories, including lipstick and make-up. We envisage a full European roll-out in late summer 2008 and we see Dork Hunters from Outer Space as a strategic cornerstone for our extensive branding initiatives. Postman Pat The range of products for the UK and Eire market include toys, playsets, plush and collectables. Character will begin developing new product lines for Postman Pat, with new products to coincide with the brand new TV series which airs on CBeebies and BBC Two in Character plans to produce a comprehensive range at a new scale to that previously seen in the market, including characters from the classic and new series. The range will be available in early Postman Pat is an iconic brand with an established heritage which has continually delighted pre-schoolers for over 25 years. We believe that this licence will become an important brand within our portfolio and a Top-5 pre-school property. Revenues from these new licenses will commence making a contribution in the 2008/2009 financial years. Product Quality We have, since the outset, taken quality control and quality assurance as a high priority in our processes, whilst also continually improving our standards and procedures. Following the recent problems which have been highlighted in the press, we have further reviewed these processes and have increased the testing of our products. We are pleased to confirm that none of our products have experienced the well publicised problems of one of our competitors. The Group will continue to focus on delivering toys and related products that not only meet the demand of the consumer but also have been manufactured or sourced to the highest standards, thereby adhering to the Group's and UK and international bodies strict guidelines. Dividend In-line with our progressive dividend policy and to further underpin the Board s confidence in the Group s portfolio of product which has already been reflected through this year s robust performance, the The Character Group plc annual report and accounts for the year ended 31 August

4 CHAIRMAN S STATEMENT CONTINUED Directors are recommending an increased final dividend of 2.4 pence per share, which together with the interim dividend of 2.0 pence makes a total dividend for the year of 4.4 pence per share, a 33% increase (2006: 3.30 pence). Subject to approval by Shareholders at the Annual General Meeting to be held on 16 January 2008, the final dividend will be paid on 25 January 2008 to Shareholders on the Register as at 4 January The shares will go ex-dividend on 2 January The total dividend is covered four times by earnings. Share Buy-Backs As we have clearly laid out to Shareholders, part of the Group s stated objectives is to continue its focus on ways to further enhance shareholder value, both through our on-going plans to implement a progressive dividend policy and monitoring the position in the market with a view to continuing to buy-back shares for Treasury and cancellation, when considered appropriate. The Directors believe that the Group has used its current authority to buy-back shares in the market to great effect, and in the period under review, this alone has resulted in an increase of 17.3% to the earnings per share. Over a two-year period, we have purchased approximately 9.15 million ordinary shares of 5p each in the Company ( Ordinary Shares ) at an average price of 86 pence per share. The buy-back to date represents approximately 20.6% of the current issued share capital of the Company (excluding shares held in Treasury). Following the cancellation of these Ordinary Shares, the Company has 44,452,937 Ordinary Shares in issue (excluding 1,000,000 Ordinary Shares in the Company held in Treasury). Share buy-backs have been used effectively to date and will continue to be considered as an effective tool for the future. In this regard, the Board has the ability to put in place a line of credit specifically for this purpose. At the forthcoming AGM, Shareholders will be asked to approve a resolution to renew the Company s authority to repurchase Ordinary Shares in the Company, up to 25% of its issued share capital (excluding Ordinary Shares held in Treasury). If this Resolution is once again approved by Shareholders, the Directors will continue to monitor the market position and will, if appropriate, make further purchases of the Company s own Ordinary Shares over the next financial year. People On behalf of the Board and all our Shareholders, I would like to welcome all new staff who joined the Group during the year. It is also an appropriate time to recognise the hard work and dedication of everyone within the Group, without whom, we would not have been able to produce another successful set of results; on behalf of the Board and Shareholders I thank all our employees. Current Trading The Group is fortunate to have within its product portfolio a strong, innovative and appealing range of toys, gifts and games. We are greatly encouraged by the continued growth of our brands, the reaction by 4 The Character Group plc annual report and accounts for the year ended 31 August 2007

5 CHAIRMAN S STATEMENT CONTINUED the consumer to our Christmas ranges, and the reception by the trade, to our new ranges for We have established ourselves as a major supplier in the UK and we believe we are well positioned to capitalise further on this position, whilst continuing to develop our international sales. Additionally, the Group has an all-time record three toys featured on the Toy Retailers Association (TRA) annual Dream Toys list announced last month, an increase of 50% over last year. The list is the only official prediction of Christmas 2007 best-sellers. In the Dream Dozen, Character has the following toys tipped for overall success: This recognition gives us confidence that the increase in market share that we enjoyed last year and which we have continued to experience since the start of the new financial year is likely to be maintained through the important Christmas period. Prospects The new financial year has started well, with our Christmas 2007 offering already having achieved a wider distribution base than for the previous Christmas. With the addition of new brands to our portfolio and the continued growth we envisage to our existing brands, we are confident of achieving a further satisfactory financial year in Doctor Who Dalek Sec Hybrid Voice Changer Mask Flytech Dragonfly Gr8 Art Bindeez Super Deluxe Studio Centre Richard King Chairman 31 October 2007 Out of five categories revealed by the TRA, twelve Character Options toys and games were featured, namely: Boys: Preschool: Games: Hip n Kool: Creative: Dr Who Dalek Sec Hybrid Voice Changer Mask Dr Who Figures Assortment Stretch Power Ranger Peppa Pig Campervan Playset Splashy the Whale Game Flytech Dragonfly Gr8 Art Bindeez Super Deluxe Studio Gr8 Scrapheap Welder The Character Group plc annual report and accounts for the year ended 31 August

6 DIRECTORS BIOGRAPHIES Richard King (aged 62), Executive Chairman, has extensive experience in the toy industry and has been involved in importing consumer products from the Far East since He established the original business of The Character Group plc jointly with Mr Kissane and Mr Shah in 1991 and works in close association with the management to develop and implement Group strategies. Kiran Shah (aged 53), Group Finance Director and Joint Managing Director, is a member of the Chartered Association of Certified Accountants. After initially working in private accountancy practice, he moved into industry and since 1978 has been involved extensively in the toy industry, notably in his role in jointly heading up a successful management buyout of Merit Toys Limited in 1981 and its subsequent sale to Bluebird Toys plc in He jointly established the original business of The Character Group plc with Mr King and Mr Kissane in April Jon Diver (aged 43), Group Marketing Director and Joint Managing Director, joined the Group in September 1991 from Rainbow Toys Limited, where he was Senior Marketing Executive. He became Group Marketing Director in August 1994, and has developed close working relationships with the Group s suppliers. He has played a key role in product development and the development and implementation of the Group s marketing strategy. Joe Kissane (aged 55), Managing Director of Character Options Limited, has considerable sales expertise in and outside the toy industry, gained over a period of 30 years, notably with such companies as Nabisco, Lego and Tonka. He is one of the founders of the Group. Ian Fenn (aged 64), Senior Independent Non-Executive Director, joined the Board in May He has extensive experience in corporate finance gained over many years in stockbroking and merchant banking in the City of London. He is a director of Blomfield Corporate Finance Limited, which is authorised and regulated by the Financial Services Authority. Lord Birdwood (aged 69), Independent Non-Executive Director, was appointed to the Board in September He has experience as a director of quoted and private companies. He has particular interests in executive placement and recruitment. He is also retained by private equity firms to advise on future technologies. David Harris (aged 57), Independent Non-Executive Director, was appointed to the Board in May He has considerable financial experience gained over a 30 year career in both executive and non-executive capacities. He is currently a non-executive director of Small Companies Dividend Trust plc, Osprey Small Companies Income Fund Ltd, Aseana Properties Ltd and COBRA Holdings Plc all of which are quoted companies. Alan MacKay (aged 45), Non-Executive Director, is a partner at 3i Investments plc, one of the world s leading private equity companies. After founding, then selling, a marketing services business, he joined 3i in 1987 and was appointed to the Board of 3i plc in He currently leads 3i investment activity in the public equities arena. He is Chairman of 3TS Capital Partners, a member of the Strategic Advisory Board of SVG Investment Advisers, and a non-executive director of AIM listed company MDY Healthcare plc. 6 The Character Group plc annual report and accounts for the year ended 31 August 2007

7 DIRECTORS REPORT AND BUSINESS REVIEW The directors present their report together with the accounts for the year ended 31 August Directors The following are the directors that served during the year: Richard King (Executive Chairman) Kirankumar Premchand Shah FCCA (Group Finance Director and Joint Managing Director) Jonathan James Diver (Group Marketing Director and Joint Managing Director) Joseph John Patrick Kissane (Managing Director, Character Options Limited) Ian Stanley Fenn (Senior Independent Non-Executive Director) Lord Birdwood (Independent Non-Executive Director) David Harris (Independent Non-Executive Director) Alan Browning Mackay (Non-Executive Director) Biographies of the directors are set out on page 7. Principal activity The Group is engaged in the design, development and international distribution of toys, games and gifts. Business review, results and dividend A review of the business is contained in the Chairman s Statement on pages 2 to 5 and the results are detailed in the consolidated profit and loss account on page 20, the consolidated statement of total recognised gains and losses on page 21, the consolidated balance sheet on page 22 and the consolidated cash flow statement on page 24. There was a profit for the year, after taxation, amounting to 8,124,000 (2006: profit 2,992,000). An interim dividend of 2.0 pence per share was paid on 25 May The directors recommend a final dividend of 2.4 pence per share making a total dividend of 4.4 pence per ordinary share (2006: 3.3 pence). If approved, the final dividend will be paid on 25 January 2008, to shareholders on the register on 4 January International Financial Reporting Standards ( IFRS ) The consolidated accounts of the Group must comply with International Financial Reporting Standards (IFRS) for reporting periods beginning on or after 1 January The Group will therefore adopt IFRS from 1 September Directors and their interests in shares The directors and their interests (all of which are beneficial) in the shares of The Character Group plc as at 31 August 2007 were as follows: Directors Number of Ordinary Shares 31 August 2007 Ordinary Shares under option Number of Ordinary Shares 31 August 2006 Ordinary Shares under option R King 3,845, ,000 5,345, ,000 K P Shah 5,645, ,000 5,645, ,000 J J P Kissane 1,462, ,000 1,462, ,000 J J Diver 1,690, ,000 1,690, ,000 I S Fenn 9,000 9,000 Lord Birdwood 8,750 8,750 D Harris 14,097 14,097 A B MacKay TOPS Pension Scheme* 450,000 1,725,000 (* Each of R King, K P Shah and J J Diver is a trustee and a beneficiary under such pension scheme arrangements.) The Character Group plc annual report and accounts for the year ended 31 August

8 DIRECTORS REPORT AND BUSINESS REVIEW CONTINUED Included in the interests of R King are his interests in shares held by Cedarberg Investments Limited, being 1,885,428 ordinary shares at 31 August 2007 and at 31 August There is also included in the interests of R King his interests in shares held by his spouse, Mrs M H King, being 320,000 shares at 31 August 2007 and at 31 August Included in the interests of K P Shah are his interests in shares held by Sarissa Holdings Limited, being 5,620,000 ordinary shares at 31 August 2007 and at 31 August Further, Orbis Pension Trustees Limited, the trustee of the Company s employee share ownership trust ( the Trust ), held 285,000 ordinary shares at 31 August 2007 and at 31 August Each of R King, K P Shah, J J P Kissane and J J Diver is deemed to be interested in such holding by virtue of being within the class of beneficiaries defined by the Trust. A B MacKay is a partner of 3i Investments plc, adviser to 3i Quoted Private Equity Limited which has a beneficial interest in 11,525,898 ordinary shares at 31 August Employment policies The Group depends on the skills and commitment of its employees in order to achieve its objectives. Group staff at every level are encouraged to make their fullest possible contribution to the Group s success. The Group s selection, training, development and promotion policies ensure equal opportunities for all employees regardless of gender, marital status, race, age or disability. All decisions are based on merit. It is the Group s policy not to discriminate between employees or potential employees on any grounds. Full and fair consideration is given to the recruitment, training and promotion of disabled people and should staff become disabled during the course of their employment, efforts would be made to provide appropriate re-training. The Group places enormous importance on the contributions of its employees and aims to keep them informed of developments in the Group by way of regular meetings, newsletters and publications, together with distribution of the Annual Report. Employees are encouraged to become involved in the financial performance of the Group through participation in the Group s share option schemes. Research and development The Group s research and development activities are concentrated on the development of new products, new processes and improvements to, or developments of, existing products. Policy and practice on payment of creditors The Group does not follow any standard code of practice for paying its suppliers but, instead, agrees with each principal supplier the terms of payment for each transaction or series of transactions. The Group s policy is then to abide by those pre-arranged terms for payment. At 31 August 2007, trade creditors of the Group represented an average of 74 (2006:75) days credit in relation to total purchases for the year. Statement of directors responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and United Kingdom Generally Accepted Accounting Practice. Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss of the Group for that year. In preparing those financial statements the directors are required to: select suitable accounting policies and apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the accounts on a going concern basis unless it is inappropriate to presume that the Group will continue in business. 8 The Character Group plc annual report and accounts for the year ended 31 August 2007

9 DIRECTORS REPORT AND BUSINESS REVIEW CONTINUED The directors are responsible for keeping accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with the Companies Act They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Group s financial statements are published on the Group s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group s website is the responsibility of the directors. The directors responsibility also extends to the ongoing integrity of the financial statements. Statement of Disclosure to Auditors In so far as the Directors are aware: there is no relevant audit information of which the Group s auditors are unaware; and they have taken all steps they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Group s auditors are aware of that information. Substantial shareholders other than directors At 31 October 2007 the following, other than the directors and their family interests, had notified the Company of an interest in 3% or more of the Company s ordinary shares: Name Number of ordinary shares Shareholding % (excluding shares held in Treasury) 3i Quoted Private Equity Limited 11,525, % Sweet Briar Investments Limited 1,675, % Changes in Share Capital During the year, 491,750 ordinary shares of 5 pence each in the Company were issued to various employees on exercise of their share options. Details of such shares issued are given in note 16 to the accounts. Also, during the year 4,087,722 ordinary shares were repurchased for cancellation, and 650,000 ordinary shares were repurchased and are held as treasury shares. Also, 775,000 ordinary shares from Treasury were sold. Details are given in note 16 to the accounts. Share option schemes Details of the Company s share option schemes are given in note 16 to the accounts. Charitable and political donations Payments of a charitable nature made during the year amounted to 93,726 (2006: 31,883). There were no political contributions in either year. Annual General Meeting Notice convening an annual general meeting of the Company is set out on page 41 of this document. Full details of the business to be transacted at that meeting are set out in that notice. The business of the meeting will include special business proposing the consideration of resolutions to: renew the directors general authority to allot unissued shares in the capital of the Company up to an aggregate nominal amount of 740,800 (14,816,000 ordinary shares of 5 pence each in the capital of the Company). This authority will expire on whichever is the earlier of the conclusion of the annual general meeting of the Company to be held in 2009 or the date falling 15 months following the passing of this resolution. The directors have no present intention to exercise this authority, which represents approximately 33.3% of the issued share capital of the Company at 31 August 2007, excluding shares held in treasury; authorise the directors to offer to allot new shares in the Company to shareholders who elect to accept the same in lieu of any cash dividend entitlement; The Character Group plc annual report and accounts for the year ended 31 August

10 DIRECTORS REPORT AND BUSINESS REVIEW CONTINUED authorise the Company to make purchases of issued ordinary shares in the Company in the market for cancellation, or to be held in treasury, if and when the directors consider that it would be in the best interest of the Company and shareholders generally to do so, up to a maximum of 11,113,200 ordinary shares of 5 pence each in the capital of the Company (representing approximately 25% of the current issued share capital of the Company, excluding shares held in treasury). The price at which an ordinary share in the Company may be purchased in exercise of this authority is subject to a maximum price of 105% of the average middle market price of an issued share in the Company in the five business days prior to purchase and a minimum of 5 pence, being the nominal value of an issued share in the Company. The directors intend to exercise this authority if and when to do so will, in the opinion of the directors, enhance shareholder value. If all options granted by the Company (pursuant to the Group s share option schemes and arrangements particularised in note 16 to the accounts) and subsisting as at 31 October 2007 were exercised a total of 2,812,500 new ordinary shares would be allotted, representing approximately 5.95% of the enlarged issue share capital of the Company following such exercise (excluding shares held in treasury). If the authority proposed for the buy-back of shares by the Company was to be exercised in full, then the number of shares to be issued on exercise of the said options would constitute approximately 7.78% of the issued share capital as enlarged by such allotments of shares (excluding shares held in treasury); allow the Company to send or supply documents and information to its shareholders by making them available on the Company's website. On 20 January 2007, new provisions within the Companies Act 2006 came into force concerning the ways in which a company is permitted to communicate with and supply information to its shareholders. Subject to this resolution being passed by shareholders, the Company may be able to use its website to publish documents and communications required or authorised to be sent or supplied by the Company to its shareholders (such as its interim reports, notices of general meetings and its annual report and accounts) as its default method of publication. The Company would like to be in a position to take advantage of these new provisions and so reduce the bulk in communications with shareholders that are currently required to be sent by post. This will potentially achieve cost savings and reduce the impact that unnecessary printing and distribution of some of these bulky documents has on the environment. Subject to this resolution being passed, the Companies Act 2006 entitles the Company to invite shareholders to agree that shareholder information may be supplied by means of a website. Shareholders who do not confirm that they wish to continue to receive hard copies of such communications within 28 days of any such invitation being made are deemed to have agreed to the Company communicating with them by means of the website. Where shareholders agree (or are deemed to have agreed) to communication by means of the website, they will be notified promptly by the Company, by post, of the availability of the relevant documents or information on the website. Shareholders will at all times continue to be entitled to request the Company to provide a paper copy of any documents which are provided by means of a website, if they so wish. There is no present intention to issue invitations in the manner required by the Companies Act 2006 and shareholders will receive notice of an intention to implement this regime by the Company, if and when any such decision is taken by the Board. approve a disapplication of shareholder pre-emption rights to enable the issue of equity securities in connection with any rights issues and/or an offer of issued shares held in treasury by way of rights made by the Company, with certain adjustments to shareholder entitlements to be made for practical purposes to deal with fractional entitlements and overseas restrictions on offers of shares in UK companies, and further limited disapplications of these pre-emption rights applying in relation to: (i) the allotment for cash of up to an aggregate nominal amount of 222,264 (4,445,280 ordinary shares of 5 pence each in the capital of the Company), representing approximately 10% of the nominal value of the issued ordinary share capital of the Company as at 31 August 2007 (excluding shares held in treasury); (ii) the sale of all or any of the 1,000,000 ordinary shares of 5 pence each in the capital of the Company held in treasury as at 31 October Auditors A resolution to reappoint HLB Vantis Audit plc as auditors to the Company will be proposed at the annual general meeting, convened by the notice set out on page 44 of this document. 10 The Character Group plc annual report and accounts for the year ended 31 August 2007

11 CORPORATE GOVERNANCE STATEMENT The directors continue to embrace the principles contained in the combined code of corporate governance issued in July 2003 as applicable to fully listed companies. Directors The Board of directors comprises four executive directors and four non-executive directors, as detailed on page 6. The independent non-executive directors are Lord Birdwood, Mr Fenn (who is the senior independent non-executive director) and Mr Harris. The Board is structured so that no one individual or group dominates the decision-making process. Board meetings are held at least four times a year and at other times as required to address requirements arising between these scheduled meetings. During the year, five Board meetings were held. The directors attended as follows: Attendance R King 4 K P Shah 5 J J P Kissane 5 J J Diver 4 I S Fenn 5 Lord Birdwood 4 D Harris 5 A B Mackay 5 The Board has a formal schedule of matters reserved for its decision. It determines the overall Group strategy; creation, acquisition or disposal of material corporate entities or assets; public announcements (including statutory accounts); significant changes in accounting policy, capital structure and dividend policy; group remuneration policy and Board structure, composition and succession. The Board delegates to management, through the Executive Directors, the overall performance of the Group, which is conducted principally through the setting of clear objectives. The Board has established an Audit Committee, a Remuneration Committee and a Nominations Committee, with duties and responsibilities formally delegated to them. The terms of reference set out each Committee s responsibilities. The terms of reference for the Audit Committee can be viewed at the Company s Registered Office. Evaluation of the Board, Board Committees and Directors The performance evaluation of the Board, its Committees and directors is undertaken by the Chairman and implemented in collaboration with the Committee Chairmen. The 2007 Board evaluation was conducted by way of a discussion between the Chairman and each of the directors. The independent non-executive directors met separately to review the Chairman s performance and provide feedback to him. Following formal performance evaluation, the Chairman confirms that the performance of non-executive directors continues to be effective and demonstrates their commitment to the role. Audit Committee I S Fenn (Chairman), Lord Birdwood and D Harris The Audit Committee is responsible for ensuring that the financial performance of the Group is properly measured and reported and for reviewing reports from the auditors relating to Group accounts and the Group s internal control systems. The committee is also responsible for the development, implementation and monitoring of the Company s policy on external audit. The committee reserves oversight responsibility for monitoring the auditors' independence, objectivity and compliance with ethical and regulatory requirements. The committee also ensures that key partners within the external auditors are rotated from time to time in accordance with UK rules. During the year, two meetings were held which were attended by all three members. Remuneration Committee Lord Birdwood (Chairman), I S Fenn and D Harris The Remuneration Committee is responsible for setting the remuneration of the executive directors and the senior management and for the operation of the Company s share option schemes. The Directors Remuneration Report is shown on pages 15 to 17. During the year two meetings were held, which were attended by all three members. The Character Group plc annual report and accounts for the year ended 31 August

12 CORPORATE GOVERNANCE STATEMENT CONTINUED Nominations Committee R King (Chairman), Lord Birdwood, I S Fenn and D Harris The Nominations Committee is responsible for considering and recommending to the Board changes in the Board s composition and membership. No meetings were held during the year. All non-executive directors of the Company who are members of these committees are entitled to seek, at the Company s expense, independent professional advice in connection with their roles on these committees. Internal Control The Board is ultimately responsible for the Group s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. Following publication of the guidance for directors on internal control Internal Control: Guidance for Directors on the Combined Code, the Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. This process has been in place throughout the year under review and up to the date of approval of the annual report and accounts and is regularly reviewed by the Board and accords with the guidance. The Board has reviewed the effectiveness of the system of internal control. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks are managed. Key elements of the Group s system of internal control are as follows: Control environment the setting of appropriate levels of authorisation which must be adhered to as the Group conducts its business the implementation of a recognised organisational and management reporting structure within which individual executive directors have responsibility for the day-to-day running of the business established and detailed procedures for the setting of annual budgets and monthly forecasts and the ongoing monitoring of actual financial performance against these targets, on a monthly basis, both at operational and Board level a clearly defined and well-established set of accounting policies which ensure that the financial performance is recorded on a consistent and appropriate basis throughout the Group s reporting entities. Monitoring and corrective action There are ongoing procedures in place for monitoring the system of internal financial controls. The remit of the Audit Committee includes meeting to review the effectiveness of the Group s system of internal financial controls and considering reports made to it by the Group s auditors. The Group does not have an internal audit function. During the year the Board has reviewed the need for an internal audit function and continues to believe that the current size of the Group does not warrant the establishment of an internal audit function. The need for an internal audit function will continue to be reviewed on an annual basis. During 2006, the Directors undertook to review the internal systems and procedures with the Group s internal and external business partners in order to attain the ISO 9001:2000 Quality Management Systems accreditation. As a result, the Company has appointed The British Standards Institute to act as external quality auditors. Risk management Management are responsible for the identification and evaluation of significant risks applicable to their areas of the business together with the design and operation of suitable internal controls. These risks are assessed on a continual basis and may be associated with a variety of internal or external sources, including control breakdowns, disruption in information systems, natural catastrophe and regulatory requirements. Management report to the Board regularly on their review of risks and how they have managed the risks. The Board reviews the key risks inherent in the business and the system of control necessary to manage such risks. 12 The Character Group plc annual report and accounts for the year ended 31 August 2007

13 CORPORATE GOVERNANCE STATEMENT CONTINUED Liquidity risk The Group finances itself through a combination of equity and short-term debt. The Group satisfied its liquidity requirements during the period under review. The Group s main working capital facility is provided by invoice discounting. There was also continued use of short-term bank facilities during the period under review. As at 31 August 2007, the Group had committed bank facilities of 19.5 million, of which 3.4 million was undrawn. Interest Rate Risk The Group finances its operations through a mixture of invoice discounting, trade finance and bank borrowings. All such facilities are at variable rates of interest. Foreign currency risk The Group faces foreign currency exposures on translation of the net assets and results of its overseas subsidiaries and on trading transactions undertaken mainly in US dollars. The Group seeks to mitigate the effect of its currency exposures by buying currency forward when appropriate. The Group does not hedge its resulting translation exposures as these are accounting rather than cash exposures. Further information on the Group s use of financial instruments and exposure to risk are given in note 23 of the accounts. Environmental During 2007, further new EU Regulations concerning the control and registration of chemicals entering the EU came into force and will have an influence on the Group s controls in factories. The Regulations are as follows: The R.E.A.C.H Regulations The REACH Regulations (Registration, Evaluation and Authorisation of Chemicals) came into force in the EU on 1 June The Regulation introduces a new framework for legislation of chemicals in the EU, replacing a number of previous Directives and Regulations. The new scheme places the burden of responsibility for safe use of chemicals onto the suppliers of those substances, rather than on the authorities. The process involves: Registration: Submission of a dossier of information on the substance to the European Chemicals Agency (ECHA), including a Chemical Safety Assessment where appropriate Evaluation: Review of the substance properties and identification of further testing needs Authorisation: Implementation of controls on substances where safe use cannot be demonstrated. One of the highest priorities of REACH is to identify so-called substances of very high concern (svhc), so that their manufacture and use can be controlled in order to protect the environment and human health. Substances of very high concern will be subject to authorisation. A list of candidate substances for authorisation will be published by the ECHA. Substances that are included in the list will require authorisation for each use. Authorisation will only be granted if suitable alternatives are not available and provided risks can be adequately controlled. Substances that are of very high concern include: Persistent, Bioaccumulative and Toxic substances (PBT) Substances which are very persistent and very bioaccumulative (vpvb) Substances classified as Carcinogenic, Mutagenic or toxic to Reproduction (CMR) Substances with endocrine disrupting properties, known as EDCs. Timetable for implementation (set up by the European Chemicals Agency) 1st June st June st December th November st May 2018 REACH regulations come into force Entry into operation Registration of materials Review of new substances. The Character Group plc annual report and accounts for the year ended 31 August

14 CORPORATE GOVERNANCE STATEMENT CONTINUED The Group continues to recognise that it can make a difference to the environment it works in and delivers to. With this in mind, the Group is still aiming to achieve, within its quality management system, accreditation to ISO 14001:2004. The Group s key quality targets still continue to be: reduce packaging waste; recycle more product; reduce energy consumption in product design and increase its green office practices. In 2006, the independent Pass Compliance Scheme run by Product Assurance Limited was introduced to the Group s supplier base, which controls the management of hazardous materials within the Group's product ranges. The benefits of endorsing such a scheme will be borne out during 2007/8 as REACH will potentially become a complex administration process and will be administered by the PASS Compliance Scheme group of experts. A subsidiary is a stakeholder representing the toy industry in consultations concerning the EuP Directive (Energy Using Products) which concerns itself with the reduction of energy consumption associated with electronic products, such as toys that are supplied with or require the use of battery chargers and/or mains adaptors. Relations with shareholders The Board supports the principle of clear reporting of financial performance to shareholders. Each year, shareholders receive a full annual report and an interim report, with supplementary trading statements issued from time to time where appropriate. Members of the Board will be available at the forthcoming Annual General Meeting to answer any questions from the shareholders. Compliance statement Throughout the year the Group has fully complied with the provisions of the Combined Code with the following exception: Code provision A.7.1 states that all directors should be subject to re-election at intervals of no more than three years. The executive directors service contracts were prepared before the Combined Code was issued and, as such, do not contain such re-election provisions. An amendment cannot be made unilaterally by the Company to an executive director s service contract and any such amendment would, accordingly, have to be negotiated in turn with each executive director. Given the significant shareholdings of the executive directors, and the potential cost to the Company of compensating the executive directors for any such amendment to their contracts, the Board considers that the existing arrangements with the executive directors should, for the time being, remain undisturbed in this respect. Going Concern After making enquiries, the Board considers that the Group has adequate resources to continue operating for the foreseeable future and has therefore adopted the going concern basis in preparing the accounts. By Order of the Board K P Shah FCCA Secretary Registered Office: 5 th Floor 4 Chiswell Street London EC1Y 4UP 31 October The Character Group plc annual report and accounts for the year ended 31 August 2007

15 DIRECTORS REMUNERATION REPORT The Board presents the Remuneration Report for the year ended 31 August The Remuneration Committee The Remuneration Committee consists of three independent non-executive directors: Lord Birdwood, Mr Fenn and Mr Harris. The policy of the Remuneration Committee is framed to give consideration to the provisions as to best practice set out in the Combined Code. Remuneration of Directors Each executive director is paid a basic salary and is entitled to benefits, namely payments of pension contributions to a suitable scheme of his choice, the option of the use of a company car, fuel and/or mileage allowance and participation in a private health care scheme. Each of the executive directors is also entitled under the terms of his service contract to a bonus of an amount up to his basic salary in the event that specified performance targets are met or exceeded. These targets require increases in earnings per share in each financial year of the Group, adjusted to exclude certain exceptional non trading items. Mr Diver is also entitled to a further bonus of 2% of pre-tax profits in the event that a specified target is met. The basic salaries referred to above are reviewed every year by the Remuneration Committee. The service contracts of the executive directors incorporate notice periods of 12 months. These arrangements were originally agreed by the Board of directors in May 1995, just prior to the flotation of the Company on the London Stock Exchange, in consultation with their legal and financial advisers and have recently been reviewed by the Remuneration Committee. In originally establishing these arrangements, and in the recent review, due account was taken of other quoted companies of comparable size and business complexity and, in particular, of the need to put in place incentive arrangements for each executive director which would be challenging and compatible with sustainable growth in shareholder value, whilst not being over-complicated or manipulable. The Board s policy on pension arrangements is to favour money purchase schemes rather than defined benefit ( final salary ) schemes. The Company believes that share ownership by executive directors and senior executives strengthens the links between their personal interests and those of the shareholders. All executive directors are entitled to participate in the Company s unapproved executive Share Option Plan, details of which may also be found in note 16 to the accounts. The non-executive directors are appointed for a fixed term expiring at each Annual General Meeting of the Company, when they may offer themselves for re-election. Each of the non-executive directors is entitled to fees, currently at the rate of 20,000 per annum (2006: 20,000), plus expenses, without any right to compensation on early termination. The Character Group plc annual report and accounts for the year ended 31 August

16 DIRECTORS REMUNERATION REPORT CONTINUED Audited Information The following table shows a breakdown of the remuneration of the directors for the year ended 31 August 2007 and the year ended 31 August Year ended 31 August 2007 Salary/fees Performance bonus Benefits in kind Pension contribution R King 184, ,388 2,628 64, ,940 K P Shah 182, ,160 1,787 54, ,755 J J Diver 182, ,160 9,533 36, ,285 J J P Kissane 159, ,698 3,320 47, ,625 I S Fenn (non-executive) 20,000 20,000 Lord Birdwood (non-executive) 20,000 20,000 D Harris (non-executive) 20,000 20,000 A B MacKay (non-executive) 20,000 20, , ,406 17, ,525 1,957,605 Total Year ended 31 August 2006 Salary/fees Performance bonus Benefits in kind Pension contribution R King 167, ,625 5,138 58, ,057 K P Shah 165, ,600 2,980 49, ,860 J J Diver 145, ,182 10,941 29, ,339 J J P Kissane 145, ,180 3,072 43, ,986 I S Fenn (non-executive) 20,000 20,000 Lord Birdwood (non-executive) 20,000 20,000 A G Horvat (non-executive) 15,000 15,000 D Harris (non-executive) 20,000 20,000 A B MacKay (non-executive) Total 698, ,587 22, ,939 1,681,242 On 5 February 2003, options over 185,000 new ordinary shares in the Company were granted to each of J J P Kissane and J J Diver. These options were granted pursuant to the Company's Enterprise Management Incentive Share Option Scheme, which was approved by shareholders on 22 January The options are exercisable at a price of 54 pence per share normally no earlier than three years and not later than ten years from the date of grant, subject to the achievement of a predetermined profit related performance target, which has been achieved. On 11 May 2006, options were granted over 960,000 new ordinary shares in the Company to the four executive directors as follows: Options granted R King 250,000 K P Shah 250,000 J J Diver 230,000 J J P Kissane 230,000 These options were granted pursuant to the 2006 Share Option Plan, which was approved by shareholders on 29 November 2005 and adopted by the Company on 22 February The options are exercisable at a price of 63 pence per share normally no earlier than three years and not later than ten years from the date of grant, subject to the achievement of a predetermined profit related performance target, which has been achieved. 16 The Character Group plc annual report and accounts for the year ended 31 August 2007