FARNBOROUGH (HOLDINGS) LIMITED Annual Report and Financial Statements 2006 Registered number: 03946303 The Annual Report and Financial Statements were approved on 27 July 2006. On 29 August 2006 the company s name changed to Hogg Robinson Group plc.
contents Farnborough (Holdings) Limited ANNUAL REPORT AND ACCOUNTS For the year ended 31 March 2006 1-2 Report of the Directors 3 Statement of Director s Responsibilities 4-7 Report on Remuneration Policy 8 Independent Auditors Report to members of Farnborough (Holdings) Limited 9 Consolidated Income Statement 10 Consolidated Balance Sheet 11-12 Consolidated Cashflow Statement 13-15 Accounting Policies 16-51 Notes to the Consolidated Financial Statements 52 Company Balance Sheet 53 Independent Auditor s Report to members of Farnborough (Holdings) Limited 54-56 Notes to the Company Financial Statements Farnborough (Holdings) Limited 2
report of the directors The directors have pleasure in presenting their Report together with the financial statements of Farnborough (Holdings) Limited ( the company ) and its subsidiary undertakings ( the Group ) for the year ended 31 March 2006. Principal activities In the year under review, the principal activities of the Group, of which Farnborough (Holdings) Limited is the holding company, have been to provide business services in two core activities: business travel and benefits and consulting services. On 8 July 2005, the Group sold its Benefits and Consulting Services division. Since this date the principal activity of the Group has been global corporate travel. Business review The directors consider the results of the Group for the year ended 31 March 2006 to be satisfactory. Results During the year Revenues and Operating Profit have increased by 26,601,000 and 9,374,000 respectively. Contributions and the realisation of synergies from acquired companies since 2004 to the Group s results were a primary driver of the increases. The industry recovery followed a period of depressed demand due to extraordinary events (for example September 11, the Iraq conflict, SARS). In the year to 31 March 2006 there are operating exceptional credits of 6,952,000 included in the financial statements relating to pensions. These include 5,000,000 following a change in rules in the UK to permit employees to take a greater proportion of their entitlement as cash on retirement. External market Historically, a substantial source of the Group s turnover was commissions received from travel distributors and suppliers. In recent years, competition in the airline industry has intensified, with airlines pursuing cost reductions in virtually all aspects of their operations. As part of these cost reduction efforts, airlines have sought to reduce or eliminate commissions paid to travel management companies, such as the Group. Anticipating these changes, the Group has sought to change its arrangements with its clients by charging them a fee for travel management services provided, thereby compensating for the elimination or reduction of commissions received from travel distributors and suppliers. In addition, an increasing number of multi-national corporations (MNCs) are allocating travel responsibility to dedicated procurement departments, which are expected to achieve cost savings. In response the Group is seeking to reduce its costs, for example, by establishing low-cost service centres, and to mitigate the impact on its turnover by selling its clients value added services. In recent years, the corporate travel industry has become more competitive amongst the larger travel management companies. Additional competition results from the growth of online travel agencies, airlines and hotel companies, which have aggressively pursued direct online distribution of travel products and services over the last several years, with supplier growth outpacing third party online growth since 2002. This competition is expected to continue and is particularly relevant to the Group s small and medium sized corporate clients, which have less complex travel needs. Acquisitions and disposals During the year the Group sold its Benefits and Consulting Services division and partially sold its investment in TRX Inc., but made important acquisitions in the US, namely Hogg Robinson USA LLC (formerly Sea Gate Travel Group LLC), AMP Corp. and Robustelli World Travel. These acquisitions were consistent with the Group s strategy, in line with rapid consolidation within the corporate travel industry, a trend primarily driven by the fact that MNCs are increasingly issuing multi-regional or global requests for proposals. In addition, the Group further invested in Spendvision Holdings Limited, a leading expense management and data solutions company. This was consistent with the Group s strategy of providing a range of value added services to clients. Group position at 31 March 2006 The directors expect the level of activity sustained during the year to continue in the foreseeable future although some uncertainty as to future conditions exists caused by the current level of structural, political and economic uncertainty. Share capital In April 2005 5,726 Preference Shares of 1 each were issued for cash. A further 5,663,550 Preference Shares of 1 each were issued in January 2006 in settlement of deferred consideration for the acquisition of Sea Gate Travel Group LLC. Results and dividends The results for the Group are set out in the consolidated income statement. No ordinary dividends were paid or proposed by the directors during the year. A loss of 6,745,000 (2005: loss 22,797,000) has been taken to reserves. Information in respect of the use of financial instruments can be found in note 13 to the financial statements. Farnborough (Holdings) Limited 1
report of the directors Post balance sheet events Post balance sheet events are detailed in note 29 to the financial statements. Pensions The Group accounts for pensions under IAS 19 Employee Benefits. On this basis the deficit in the Group s pensions schemes at 31 March 2006 was 124.5m (2005: 151.1m) (note 19). As with most pension schemes, assets are invested for the long term but the valuation referred to above reflected market conditions as at 31 March 2006. The reduction in the IAS 19 pension liability principally reflects the return on scheme assets in the year and the level of the Group s contributions. Directors The directors who held office during the year were as follows: Dr N C Bain (Chairman) (Resigned as Chairman 1 April 2006) D J C Radcliffe (Chief Executive Officer) R K Bacher W F Brindle C P Fry M C Garland F S Jones (Resigned 8 July 2005) J F W Kennerley K A Ruffles R M Westwood J D Coombe was appointed as Chairman on 1 April 2006. Directors interests The beneficial interests of the directors in the shares of the company are shown in note d of the Board Report on Remuneration Policy. Other than contracts for service and documents relating to the founding of Farnborough (Holdings) Limited and in connection with the management buy-out of the company, there were no significant contracts between the directors and any member company of the Group during or at the end of the year. Employees Employees are informed of the performance of the Group and of any factors affecting their employment. Annual reports are made available to all staff and they are encouraged to assist the Group s onward development. Fair and full consideration is given to applications for employment from disabled persons having regard to their particular aptitudes and abilities. Efforts are made to continue the employment of those who become disabled. Training, career development and promotion opportunities are, as far as practicable, identical for all employees. The Group consistently seeks to recruit, develop and employ suitably qualified, capable and experienced people in an environment of equal opportunity. The Group aims to maintain a high standard of safe and healthy working conditions comparable with the best practices in the particular industries in which it operates. Environmental policy The Group s trading activities have only a marginal direct impact on the environment and contribute minimally to pollution. The Group is committed to conducting its business in a manner that shows responsibility towards the environment and in ensuring high standards of health and safety for its employees. It complies with statutory and mandatory requirements and where practicable aims to exceed regulations applicable to its areas of business. Working practices are routinely monitored as improved techniques and technologies become available. Donations The Group has made charitable donations during the year totalling 37,000 (2005: 54,000). Of the total charitable donations made in the year 21,000 (2005: 38,000) was made by the Group and the remainder was paid on behalf of the employees. No political donations were made during the year (2005: nil). Policy for paying suppliers The company s current policy concerning the payment of its trade creditors and other suppliers is to: (a) settle the terms of payment with those suppliers when agreeing the terms of each transaction; (b) ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and (c) pay in accordance with its contractual and other legal obligations. Wherever possible UK subsidiaries follow the same policy. Overseas subsidiaries are encouraged to adopt similar policies by applying local best practice. One effect of these policies is that the figure for trade creditors for the Group at the end of the financial year represents 9 days purchases (2005: 12 days). Farnborough (Holdings) Limited 2
statement of directors responsibilities Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company and the Group and of the profit or loss of the company and the Group for that period. In preparing those financial statements the directors are required to: a) select suitable accounting policies and then apply them consistently; b) make judgements and estimates that are reasonable and prudent; c) state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business in which case there should be supporting assumptions or qualifications as necessary. This statement should cover both the company and the Group as a whole. As far as the directors are aware, there is no relevant audit information of which the company s auditors are unaware. The directors have taken appropriate steps to establish that the company s auditors are aware of such information. The directors are responsible for maintaining the integrity of the financial information, including the Annual Report, on the Hogg Robinson Group plc website, www.hoggrobinson.com. Legislation in the UK concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditors A resolution to appoint PricewaterhouseCoopers LLP as auditors to the company will be proposed at the Annual General Meeting. On behalf of the Board, The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and the Group and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. K J BURGESS Company Secretary Date: 27 July 2006 Farnborough (Holdings) Limited 3
report on remuneration policy Committee membership during the year The remuneration of executive directors is determined by the Remuneration Committee of Farnborough (Holdings) Limited. The members of the Remuneration Committee are Dr N C Bain and Mr M C Garland. In addition, Mr J Coombe was appointed to this committee with effect from 1 April 2006. Remuneration policy When deciding appropriate levels of salary and other forms of remuneration, the Remuneration Committee took into account: i) the annual and continuing performance of each director within his sphere of operation; ii) the requirement to ensure that improving shareholders returns are achieved; iii) the company s need to provide sufficiently attractive remuneration packages for the recruitment and retention of executives able to provide direction and motivation; and iv) appropriate market rates. Elements of remuneration a) Basic salaries Individual basic salaries are reviewed annually by the Remuneration Committee which takes into account related performance and any responsibility changes. b) Non-cash benefits (other than pensions) The company provides a comprehensive package of employment benefits for executive directors. Principal elements include a fully expensed company car, life insurance, private health insurance, personal accident insurance and permanent disability insurance, none of which are pensionable. c) Annual bonus plan In addition to salary, all directors were eligible for an annual performance-related bonus, which is non-pensionable. The Board believes it is important that the directors have a substantial part of their annual remuneration based on performance. The bonus earned by executive directors in relation to the Group s results for the year ended 31 March 2006 is set out in the Total Remuneration table in this report. d) Share interests The interests, all of which were beneficial, of the directors of the company and persons connected with them in the shares of the company, Farnborough (Holdings) Limited, are listed below: A B B Redeemable Ordinary Ordinary Ordinary Shares Shares Shares Preference Preference Preference 31 March 2005 31 March 2005 31 March 2005 Shares Shares Shares & 31 March 2006 & 31 March 2006 & 31 March 2006 31 March 2005 Issued 31 March 2006 Number Number Number Number Number Number Dr N C Bain (Chairman) 45,625 2,824 808 64,694-64,694 D J C Radcliffe 82,125 1,958 558 2,598-2,598 R K Bacher 12,774 305 87 586 5,726 6,312 W F Brindle 18,250 435 124 578-578 C P Fry 27,375 652 186 22,145-22,145 J F W Kennerley 27,375 2,389 683 50,962-50,962 K A Ruffles 27,375 652 186 868-868 R M Westwood 27,375 652 186 30,398-30,398 268,274 9,867 2,818 172,829 5,726 178,555 Mr M C Garland has an indirect economic interest in the B Ordinary Shares, B Redeemable Ordinary Shares and Preference Shares. Permira Funds hold the following: 31 March 2005 & 31 March 2006 Number B Ordinary shares 1,907,350 B Redeemable shares 544,927 Preference Shares 36,171,080 Farnborough (Holdings) Limited 4
report on remuneration policy e) Hogg Robinson 1987 Pension Scheme With the exception of Dr N C Bain, Mr R K Bacher, Mr M C Garland and Mr J D Coombe the directors are members of the Hogg Robinson Plc Defined Benefit Pension Scheme (referred to in note 19 of the financial statements) to which they contribute 6% of Pensionable Salary, that is basic annual salary less the Lower Earnings Limit. The scheme provides an accrual rate of 2% of Pensionable Salary for each year of service, and certain of the longer serving directors have a five-year service credit. The pension which can be provided under the scheme is limited by Inland Revenue rules. In respect of certain senior employees (who were otherwise limited as to the level of their potential pension), the Remuneration Committee has agreed an additional non-pensionable supplement representing a fixed 18% of their salary (30% if their normal retirement age is 60) insofar as it exceeds the permitted maximum. Pensions in respect of service up to August 1999 are increased in payment, and in deferment after leaving service, at 5% per annum compound; pensions in respect of service after this date are increased in payment and deferment in line with inflation up to 5% p.a. The normal retirement age for Messrs Radcliffe, Brindle, Fry, Kennerley, Ruffles and Westwood is 60. On death after retirement a spouse s pension of one half of the member s pension is payable. Any transfer value calculations would make no allowance for discretionary benefits. Mr R M Westwood reached retirement age at 5 January 2006 and started to draw his pension. He continued to act, and be paid for his services, as a director of the company. Information on Pension Entitlements for each executive director is as follows: Pension earned Total pension Directors in year payable earned at year end contributions from normal payable from normal Age at during the year retirement age retirement age 31 March 2006 p.a. p.a. D J C Radcliffe 53 18,971 11,045 180,204 C P Fry 59 10,790 7,559 131,008 W F Brindle 44 6,336 2,514 16,857 J F W Kennerley 56 6,336 2,413 12,733 K A Ruffles 53 9,170 5,496 93,121 R M Westwood 60 1,460 3,637 - f) Swiss Defined Benefit Pension Scheme Mr R K Bacher is a member of the Swiss Defined Benefit Pension Scheme and his pension entitlements are as follows for the period since appointment as a director of Farnborough (Holdings) Limited. Pension earned Total pension Directors in year payable earned at year end contributions from normal payable from normal Age at during the year retirement age retirement age 31 March 2006 p.a. p.a. R K Bacher 54 21,738 3,120 6,812 Farnborough (Holdings) Limited 5
report on remuneration policy g) Service agreements All directors, with the exception of Mr M C Garland, have service agreements with Farnborough (Holdings) Limited, the ultimate parent company. Service agreements are terminable on either side by the following notice periods: Dr N C Bain (Chairman) 6 months J F W Kennerley 18 months D J C Radcliffe 2 years K A Ruffles 2 years R K Bacher 2 years R M Westwood Note (1) W F Brindle 18 months C P Fry 2 years (1) Mr R M Westwood has a fixed term consultancy service agreement which expires on 31 December 2006, subject to any agreed renewal. The company does not believe that reducing all the contractual notice periods to one year or less would be in the best interests of the company for the purposes of ensuring that the company offers a competitive overall remuneration package. None of the service contracts contain specific termination provisions; however any compensation claims from departing directors would be scrutinised by the Remuneration Committee to ensure that prospective losses were properly mitigated. Mr M C Garland is not employed by the Group. Total remuneration The total remuneration received or receivable by the directors holding office during the year ended 31 March 2006 was as follows. The remuneration was paid or is payable by a subsidiary company, Hogg Robinson Plc. Salaries & Pension Value of Additional Annual Compensation for Loss Total Supplement Benefits Bonus Bonus of office 2006 2006 2006 2006 2006 2006 Executive Directors: Dr N C Bain (Chairman) 76,875 - - - - 76,875 D J C Radcliffe 333,929 28,737-123,976-486,642 R K Bacher 209,712 7,149-95,877-312,738 W F Brindle 180,673 21,355-62,803-264,831 C P Fry 191,709 25,912-71,185-288,806 M C Garland - - - - - - F S Jones (resigned 8 July 2005) 56,165 6,589 75,000-205,000 342,754 J F W Kennerley 264,277 27,935-84,486-376,698 K A Ruffles 167,660 23,759-62,145-253,564 R M Westwood 218,788 24,808-78,785-322,381 1,699,788 166,244 75,000 579,257 205,000 2,725,289 Farnborough (Holdings) Limited 6
report on remuneration policy Total remuneration (continued) Salaries & Pension Value of Additional Annual Total Supplement Benefits Bonus Bonus 2005 2005 2005 2005 2005 Executive directors: Dr N C Bain (Chairman) 75,100 1,244 - - 76,344 D J C Radcliffe 325,764 28,028 592,105 130,785 1,076,682 R K Bacher 183,337 11,993 8,880 73,028 277,238 W F Brindle 176,361 21,396 174,375 68,408 440,540 C P Fry 187,252 24,170 197,368 75,095 483,885 M C Garland - - - - - F S Jones (resigned 8 July 2005) 201,828 21,681 44,267 48,536 316,312 J F W Kennerley 257,956 28,323 197,368 89,126 572,773 K A Ruffles 164,546 20,391 197,368 65,558 447,863 R M Westwood 206,784 25,016 197,368 75,709 504,877 1,778,928 182,242 1,609,099 626,245 4,196,514 Additional bonuses were paid in 2005 upon completion of a recapitalisation exercise in January 2005. F S Jones ceased to be a director of the company on 8 July 2005 and received bonuses during the year in respect of his contribution to the disposal of the Benefits and Consulting Services division and payment in respect of the 12 months notice period specified in his contract. An amount of 100,000 (2005: 100,000) was payable to a third party, Permira Advisers LLP, in respect of the services of Mr M C Garland as a director of the company and its immediate subsidiary, Farnborough Limited. This was paid by Farnborough Limited. Farnborough (Holdings) Limited 7
independent auditor s report to members of farnborough (holdings) limited We have audited the Group financial statements of Farnborough (Holdings) Limited for the year ended 31 March 2006 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expense and the related notes. These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of Farnborough (Holdings) Limited for the year ended 31 March 2006. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group s circumstances, consistently applied and adequately disclosed. Respective responsibilities of directors and auditors The directors responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors Responsibilities. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group s affairs as at 31 March 2006 and of its loss and cash flows for the year then ended; and the Group financial statements have been properly prepared in accordance with the Companies Act 1985. We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors Report is not consistent with the Group financial statements, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London Date: 27 July 2006 We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Directors Report and the Report on Remuneration Policy. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Farnborough (Holdings) Limited 8
consolidated income statement Consolidated income statement Notes Continuing operations Revenue rendering of services 297,228 270,627 203,960 Operating expenses 3 (257,919) (240,692) (187,874) Operating profit 39,309 29,935 16,086 Share of results of associates and joint ventures 169 (763) 22 Finance income 5 2,225 2,928 2,806 Finance costs 5 (39,572) (47,357) (36,182) Profit/(loss) before tax 2,131 (15,257) (17,268) Income taxes 6 (799) (4,866) (671) Profit/(loss) for the period from continuing operations 1,332 (20,123) (17,939) Discontinued operations (Loss)/profit for the period from discontinued operations 7 (8,077) (2,674) 20,315 (Loss)/profit for the period (6,745) (22,797) 2,376 Attributable to: Equity holders of the parent (7,587) (23,740) 2,311 Minority interests 842 943 65 Farnborough (Holdings) Limited 9
consolidated balance sheet Consolidated balance sheet As at 31 March Notes Non current assets Goodwill and other intangible assets 8 215,718 284,632 300,121 Property, plant and equipment 9 10,686 16,153 17,886 Investments accounted for using the equity method 10 4,548 2,780 962 Financial assets other investments 11 1,750 8,697 9,044 Trade and other receivables 12 1,603 1,750 1,940 Deferred tax assets 18 40,250 42,733 34,127 274,555 356,745 364,080 Current assets Trade and other receivables 12 112,334 130,958 139,962 Financial assets derivative financial instruments 13 429 447 715 Current tax assets 498 227 1,119 Cash and cash equivalent assets 14 68,879 45,630 61,679 182,140 177,262 203,475 Total assets 456,695 534,007 567,555 Current liabilities Financial liabilities borrowings 15 (7,335) (5,279) (13,199) Current tax liabilities (7,817) (3,871) (2,497) Financial liabilities derivative financial instruments 13 (47) (456) (1,126) Trade and other payables 16 (168,261) (175,030) (179,392) Provisions 17 (5,756) (8,610) (13,226) (189,216) (193,246) (209,440) Non current liabilities Financial liabilities borrowings 15 (287,771) (337,038) (339,608) Deferred tax liabilities 18 (3,867) (3,364) (3,110) Retirement benefit obligations 19 (124,523) (151,063) (121,405) (416,161) (491,465) (464,123) Total liabilities (605,377) (684,711) (673,563) Net liabilities (148,682) (150,704) (106,008) Capital and reserves attributable to equity holders Share capital 20 37 37 37 Share warrants 20 5,290 - - Share premium 20 3,604 3,604 3,592 Exchange reserve 21 1,208 5,840 6,867 Retained earnings 21 (159,769) (161,217) (116,927) (149,630) (151,736) (106,431) Minority interest 948 1,032 423 (148,682) (150,704) (106,008) The financial statements on pages [9] to [51] were approved by the Board of Directors and were signed on its behalf by: D J C Radcliffe J F W Kennerley Date: 27 July 2006 Director Director Farnborough (Holdings) Limited 10
consolidated cashflow statement Consolidated cashflow statement Notes Profit/(loss) before tax from continuing operations 2,131 (15,257) (17,268) (Loss)/profit before tax from discontinued operations (8,077) (2,674) 20,315 (5,946) (17,931) 3,047 Adjustments for: Depreciation, amortisation and impairment 21,915 25,876 6,901 Increase in provisions 17 2,595 3,431 3,957 Effect of exchange rate movements (1,043) 1,836 449 Share of results of associates and joint ventures (169) 763 (22) Profit on disposal of discontinued operations 7 (3,492) - (14,784) Change in fair value of investments (496) - 6,781 Net finance costs 5 37,347 44,429 33,376 Adjustments to goodwill on recognition of tax assets 5 3,865 - - Other timing differences 404 236 176 54,980 58,640 39,881 Cash expenditure charged to provisions 17 (5,274) (8,393) (4,579) Change in trade and other receivables 7,324 7,076 (9,285) Change in trade and other payables (12,255) 1,264 18,854 Pension funding in excess of charge to operating profit (12,679) (4,795) (4,509) Cash effect of hedging transactions (1,493) (974) 2,553 30,603 52,818 42,915 Interest paid (17,298) (13,963) (9,535) Tax paid (2,092) (2,319) (1,644) Cash flows provided by operating activities 11,213 36,536 31,736 Acquisition of subsidiaries 23 (20,337) 5,568 (59,322) Acquisition of associates, joint ventures and other investments (1,689) (2,870) (300) Disposals 7 112,863 901 5,472 Purchase of property, plant & equipment and intangible assets (7,404) (6,081) (5,527) Proceeds from sale of property, plant & equipment 56 179 59 Interest received 1,970 2,726 2,603 Cash flows provided by/(used in) investing activities 85,459 423 (57,015) Farnborough (Holdings) Limited 11
consolidated cashflow statement Consolidated cashflow statement (continued) Notes Repayment of borrowings (81,662) (180,299) (191) New borrowings 11,202 135,824 36,787 Issue costs of new borrowings (1,754) (9,905) (6,075) Issue of shares 6 - - Dividend received from associates 243 - - Dividends paid to minority shareholders (926) (353) - Cash flows (used in)/provided by financing activities (72,891) (54,733) 30,521 Net increase/(decrease) in cash and cash equivalents 23,781 (17,774) 5,242 Net increase/(decrease) in cash and cash equivalents 23,781 (17,774) 5,242 Cash and cash equivalents at beginning of the year 44,052 60,892 56,105 Exchange rate effects 744 934 (455) Cash and cash equivalents at end of the year 68,577 44,052 60,892 Cash and cash equivalent liabilities 68,879 45,630 61,679 Overdrafts (302) (1,578) (787) 68,577 44,052 60,892 Statement of recognised income and expense Notes (Loss)/profit for the period (6,745) (22,797) 2,376 Income and expense recognised directly in equity Currency translation differences (4,632) (1,027) 1,285 Actuarial gain/(loss) 19 13,559 (29,310) 19,548 Deferred tax movement on pension liability (4,524) 8,760 (4,214) 4,403 (21,577) 16,619 Total recognised income and expense (2,342) (44,374) 18,995 Attributable to: Equity holders of the parent (3,184) (45,317) 18,930 Minority interest 842 943 65 (2,342) (44,374) 18,995 Farnborough (Holdings) Limited 12
1) Accounting policies Basis of preparation : International Financial Reporting Standards The financial statements have been prepared in compliance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with International Financial Reporting Interpretations Committee (IFRIC) interpretations. Disclosures required under IFRS 1 to set out the effect of the transition from UK GAAP to IFRS are included in note 28. The preparation of the IFRS financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Although these estimates are based on management s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. First time adoption of IFRS The financial statements constitute the first IFRS financial statements as described in IFRS1. The financial statements follow the requirements of IFRS1, First-time Adoption of International Financial Reporting Standards, with a Transition Date of 1 April 2003. Subsidiaries are entities in which the Group has the power to govern the financial and operating activities. Joint ventures are entities, other than subsidiaries, in which the Group shares control as a party to a contract. Associates are entities, other than subsidiaries or joint ventures, in which the Group has the power to participate in the financial and policy decisions. The Group accounts include the results and net assets of the company and its subsidiaries. Subsidiary companies have been consolidated from the date of acquisition to that of disposal. The Group s share of the results of associates and joint ventures is included in the income statement. Investments in associates and joint ventures are included in the balance sheet at cost adjusted by subsequent share of profits or losses and any impairment. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and rebates, value added tax and other sales related taxes. Revenue does not include transactions entered into by Group clients for which the Group acts as agent. Business travel Revenue represents the revenue earned from service fees from clients and retained supplier commissions. The following IFRS standards have been adopted before their effective dates: IAS19, Employee Benefits (as amended in December 2004) IAS39, Financial Instruments: Recognition and Measurement Basis of accounting The financial statements have been prepared on a going concern basis. The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments. The principal accounting policies adopted are set out below. These policies have been consistently applied to all years presented. Consolidation The Group financial statements include the results and net assets of Farnborough (Holdings) Limited, the company, and its subsidiaries. Together these form the Group. Subsidiary companies have been consolidated from the date of acquisition to the date of disposal. Client service fees are earned by charging a transaction or management fee for airline or other transactions, based on contractual agreements with travel clients. Transaction revenue is recognised at the time of ticketing of the travel arrangement with the exception of hotel related income, which is recognised at time of stay. Management fees are recognised over the period of time that the service is provided to the client. Suppliers pay commission on airline tickets issued and on sales and transaction volumes as well as other services provided based on contractual agreements. These revenues are recognised at the time a ticket is purchased. Benefits and consulting services Turnover consists of sales, commissions and fees. In the case of fixed price and long-term contracts, gross sales are recognised proportionately as the contract is performed. Farnborough (Holdings) Limited 13
1) Accounting policies (continued) Employee benefits Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. The assets of the defined benefit pension schemes are measured at their fair value at the balance sheet date and compared to the liabilities of those schemes at the same date, measured on an actuarial basis using the projected unit credit method. The discount rate used is the current rate of return on a high quality corporate bond of equivalent term and currency to the liabilities. Costs of defined benefit pension schemes arising from employee service in the current period are charged to operating expenses. The increase in the present value of pension scheme liabilities relating to employee service in prior periods but arising in the current period as a result of benefit improvements is charged to operating expenses over the period during which such improvements vest. The expected return on the schemes assets and the increase during the period in the present value of the schemes liabilities arising from the passage of time are included in other finance income. Actuarial gains and losses are recognised in the statement of recognised income and expense. Exceptional items Exceptional items derive from the ordinary activities of the Group and due to their size and nature are separately disclosed to provide a true and fair view of the results. Goodwill Goodwill represents the surplus of the purchase consideration, allocated to the related acquisition on the basis of fair value, over the fair value of the separable net assets acquired. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. The review of impairment includes examination of anticipated cashflows from the cash generating units to which goodwill relates. Goodwill is written down to its estimated recoverable amount, being the higher of: fair value, the amount obtainable from sale on an arm s length basis, less the costs of disposal; the value in use, the net present value of future cash flows expected to be generated from the business. When a business is disposed of the goodwill applicable is charged to the income statement as part of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS, 1 April 2003, has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Other intangible assets Intangible assets are identifiable non-monetary assets without physical substance. They are stated at cost less accumulated amortisation and impairment. Cost includes third party purchases, the directly attributable costs of internally generated assets and the fair value of identifiable intangible assets arising on acquisitions since the date of transition to IFRS, 1 April 2003. Amortisation is provided on the cost of all intangible assets, less the estimated residual value, using the straight-line basis over the estimated useful lives as follows: Computer software Client relationships in acquired businesses Property, plant and equipment 3-7 years 10 years Property, plant and equipment is stated at cost less accumulated depreciation and impairment. Depreciation is provided on the cost of all property, plant and equipment, less the estimated residual value, using the straight-line basis over the estimated useful lives as follows: Freehold properties and long-term leaseholds Short-term leasehold premiums and structural leasehold improvements Other leasehold improvements Fixtures, fittings and equipment Computers Motor vehicles Financial instruments 50 years the lease term the lesser of 7 years or the lease term 3-7 years 2-5 years 3-5 years Financial instruments are recorded initially at fair value net of issue costs incurred. Subsequent measurement depends on the designation of the instrument as follows. Borrowings are held at amortised cost. Currency swaps are stated at fair value on the balance sheet. Exchange movements on foreign currency borrowings and changes in the fair value of currency swaps are taken to the income statement.trade receivables are recognised initially at fair value with subsequent provision for impairment. Other financial instruments are stated at fair value with differences on valuation taken to the income statement. These include interest rate caps and amounts receivable or payable in foreign currency together with the forward foreign currency exchange contracts used to fix their value. Fair values are derived from published financial data. Farnborough (Holdings) Limited 14
1) Accounting policies (continued) Borrowing costs are recognised as an expense in the period in which they are incurred. Financial liabilities and equity instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. A financial liability is a contractual obligation to deliver cash or another financial asset to a third party. Foreign currencies Assets and liabilities of subsidiaries and interests in joint ventures and associates in foreign currencies are translated into sterling at the rates of exchange ruling at the end of the financial year. The results of foreign subsidiaries, joint ventures and associates are translated at the average rate of exchange for the year. Exchange differences arising on the consolidation at closing rates of net investments in subsidiaries, joint ventures and associates, together with those on foreign currency loans which finance them, are taken to reserves and reported in the statement of recognised income and expense. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill arising on acquisitions before the date of transition to IFRS as a sterling denominated asset. Leasing A lease is classified as a finance lease if it transfers substantially all the risks and rewards of ownership to the lessee. Other leases are classified as operating leases. Assets held under finance leases and hire purchase agreements are included in property, plant and equipment and are depreciated over the shorter of the lease term or its useful life. Lease obligations are stated net of finance charges attributable to future periods. Finance charges are allocated over the period of the lease. Operating lease rentals are charged to the income statement over the life of the lease. Taxation The tax expense is based on the profits for the year and includes taxation deferred because of temporary differences between the treatment of items for taxation and accounting purposes. Deferred tax is determined using tax rates and laws in place at the balance sheet date. Provision is made for all deferred tax liabilities. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which they can be utilised. Provisions Provisions are recognised when there is a present legal or constructive obligation as result of a past event, it is probable that an outflow of resources will be necessary to settle the obligation and the amount can be reliably estimated. Provisions for restructuring costs are recognised when the Group has a detailed formal plan for the restructuring that has been communicated to affected parties. Cash and cash equivalents For the purposes of the cashflow statement cash and cash equivalents includes bank balances and deposits with original maturities of three months or less. It also includes overdrafts which form an integral part of the Group s cash management and are likely to fluctuate from overdrawn to positive. Discontinued operations Discontinued operations are entities which have been disposed of and which represent a separate major line of business or geographical area of operations. Key management judgments The principal management judgments made in the preparation of these accounts are: the assessment of the impairment of goodwill at each balance sheet date (see note 8). This process depends on the preparation of estimates of future cash flows expected to be generated by each business in the Group; the assessment of the fair value of the investment in TRX Inc. (see note 11). This process depends on evaluation of future cash flows expected to be generated by this business; the evaluation of retirement benefit obligations. This depends on the actuarial assumptions set out in note 19, including estimates of future returns on scheme assets; the evaluation of the recoverability of deferred tax assets (see note 18), which depends on the assessment of the probability that there will be sufficient appropriate taxable profits available in future against which to realise them; the valuation of client relationships for intangible assets at acquisition (see note 8). This process depends on the preparation of estimates of future cash flows expected to be generated by existing clients at acquisition. Farnborough (Holdings) Limited 15
2) Segmental information All revenue, operating profit and loss for the period from continuing operations derives from business travel. Total assets Business travel 347,068 319,377 328,226 Benefits and consulting services - 126,040 142,404 347,068 445,417 470,630 Cash and cash equivalent assets 68,879 45,630 61,679 Current tax assets 498 227 1,119 Deferred tax assets 40,250 42,733 34,127 456,695 534,007 567,555 Total liabilities Business travel (174,064) (172,286) (183,337) Benefits and consulting services - (11,810) (10,407) (174,064) (184,096) (193,744) Borrowings (295,106) (342,317) (352,807) Current tax liabilities (7,817) (3,871) (2,497) Deferred tax liabilities (3,867) (3,364) (3,110) Retirement benefit obligations (124,523) (151,063) (121,405) (605,377) (684,711) (673,563) Capital expenditure Business travel 7,394 5,536 4,255 Benefits and consulting services 10 912 1,305 7,404 6,448 5,560 Depreciation and amortisation Business travel 7,832 7,877 4,948 Benefits and consulting services 401 1,770 1,872 8,233 9,647 6,820 Farnborough (Holdings) Limited 16
2) Segmental information (continued) External revenue from customers by geographical area United Kingdom 99,756 97,181 95,196 Nordic 44,918 43,064 42,741 Rest of Europe 94,806 95,656 28,505 North America 46,236 24,966 28,784 Asia Pacific 11,512 9,760 8,734 297,228 270,627 203,960 Total assets by geographical location United Kingdom 111,729 237,871 257,261 Nordic 57,287 53,269 53,665 Rest of Europe 115,294 124,536 131,708 North America 55,200 22,345 22,573 Asia Pacific 7,558 7,396 5,423 347,068 445,417 470,630 Cash and cash equivalent assets 68,879 45,630 61,679 Current tax assets 498 227 1,119 Deferred tax assets 40,250 42,733 34,127 456,695 534,007 567,555 Capital expenditure by geographical location United Kingdom 3,433 3,298 4,661 Nordic 537 645 326 Rest of Europe 2,497 1,074 261 North America 651 1,106 213 Asia Pacific 286 325 99 7,404 6,448 5,560 Farnborough (Holdings) Limited 17
3) Operating expenses Continuing operations Staff costs (note 4) 166,782 158,788 122,778 Depreciation, amortisation and impairment charges 7,832 7,877 5,029 Auditors remuneration for audit services 1,267 981 511 Operating lease rentals buildings 11,947 12,105 9,925 Operating lease rentals other assets 6,298 6,319 4,957 Release of onerous contract provisions - - (306) Other expenses 63,793 54,622 44,980 257,919 240,692 187,874 Operating expenses 261,006 240,692 187,874 Operating exceptionals: Adjustments to goodwill on recognition of tax assets (note 5) 3,865 - - Pension past service credit (note 19) (6,952) - - (3,087) - - Total operating expenses 257,919 240,692 187,874 Fees for audit related and other advisory services provided to Group companies in the United Kingdom by PricewaterhouseCoopers LLP amounted to: Further assurance services 1,925 1,243 114 Farnborough (Holdings) Limited 18
4) Staff costs Continuing operations Salaries 145,216 133,642 101,364 Redundancy and termination costs 1,735 1,084 3,302 Social security costs 17,415 15,987 13,241 Pension costs 2,416 8,075 4,871 166,782 158,788 122,778 Pension costs comprise: Defined benefit schemes 4,616 4,401 3,410 Defined benefit schemes past service credit (6,952) - - Defined contribution schemes 4,752 3,674 1,461 2,416 8,075 4,871 number number number Average number of staff: Business travel 5,954 5,419 4,443 Benefits and consulting services 1,005 1,183 1,228 6,959 6,602 5,671 The emoluments of the directors are detailed in the Report on Remuneration Policy on pages 4 to 7. 5) Net finance costs Finance income 2,225 2,928 2,806 Interest on bank overdrafts and loans (19,616) (25,765) (23,001) Amortisation of issue costs on bank loans (6,481) (9,688) (976) Interest on obligations under finance leases (19) (6) (6) Premium on preference shares (7,763) (6,928) (6,298) Expected return on pension scheme assets less interest cost on pension scheme liabilities (5,258) (4,415) (5,482) Other finance charges (435) (555) (419) Finance costs (39,572) (47,357) (36,182) Net finance costs (37,347) (44,429) (33,376) Farnborough (Holdings) Limited 19
6) Taxation Current tax: Tax on profits of the period 4,856 3,888 709 Adjustments in respect of the previous periods 910 704 (47) Total current tax 5,766 4,592 662 Deferred tax: Origination and reversal of temporary differences (999) 271 9 Adjustments in respect of the previous periods (103) 3 - Adjustments to goodwill on recognition of tax assets (3,865) - - Total deferred tax (4,967) 274 9 Tax charge 799 4,866 671 The tax assessed for the period differs from the standard rate of corporation tax in the UK (30%) as explained below: Profit/(loss) before tax: continuing operations 2,131 (15,257) (17,268) Discontinued operations (8,077) (2,674) 20,315 (5,946) (17,931) 3,047 Profit/(loss) before tax multiplied by the standard rate of corporation tax in the UK of 30% (1,784) (5,379) 914 Effects of: Partial recognition for deferred tax losses 941 2,767 294 Partial recognition for deferred tax other differences (2,369) (1,686) (3,221) Non deductible goodwill impairment 4,105 4,869 24 Impairment of TRX Inc. - - 2,034 Other expenses not deductible for tax purposes 3,075 3,413 944 Adjustments to goodwill on recognition of tax assets (2,706) - - Overseas tax rate differential (3) 325 165 Non taxable income (190) (151) (560) Non taxable chargeable gain (1,048) - - Adjustments in respect of prior periods 910 704 (47) Other (132) 4 124 Taxation charge 799 4,866 671 Farnborough (Holdings) Limited 20