Highlights 2016

"Last year was difficult and disappointing, as we faced significant challenges during the continued turnaround and improvement of the business.  We were pleased with the progress made in modernising many of our systems and processes but much of the change last year resulted in substantial unplanned disruption which had a significant adverse impact on trading performance.

"The Board has now completed a thorough review, which has identified that many core parts of the Group are stable, profitable and cash generative, driven by iconic brands with strong market positions.  The review has also identified areas that require fundamental change. The turnaround plan is intended to return the business to sustainable profitability and cash generation." (Steve Cooke, Chief Executive)

Revenue (2015: £58.1m)

£55.8m

Operating loss (2015: £0.3m profit)

£(13.1)m

Underlying1 operating loss (2015: £2.1m profit)

£(5.3)m

Reported loss before taxation (2015: £(0.2)m loss)

£(13.5)m

Underlying1 loss before taxation (2015: £1.6m profit)

£(5.7)m

Reported loss after taxation (2015: £(0.1)m loss)

£(13.7)m

Reported loss per share (2015: (0.31)p loss)

(27.87)p

Underlying basic loss per share (2015: 3.38p basic earnings)

(13.02)p

Total dividend per share (2015: nil)

nil

1   Underlying figures are before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and exceptional items.

Chairman's Statement

 1   Stated before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and  exceptional items.

Personal perspectives

The last twelve months have been extremely challenging but I am pleased with the progress made with modernising the business. I believe we have in place the right leadership and a pool of talented people to deliver the plan to return the business to sustainable profit and cash generation.

Last year resulted in some strongly contrasting emotions. On the one hand trading was very disappointing with the implementation of the new ERP system and reorganisation of our European businesses disrupting our delivery and our ability to service our customers. However, on the other hand, although it is important to focus on the financial underperformance, we achieved much last year and I am pleased with the progress we have made in improving and modernising the business. I believe we have ended the year in a stronger place following the comprehensive review of the business and commitment to a new clear plan to continue the turnaround of the business.

In the UK, as previously announced, sales during the summer of 2015 were disrupted by the implementation of the new ERP system. Trading was then strong during the key Christmas season but weakened dramatically into the new year. Despite the problems, overall external sales increased by 3% year on year and this was key to ensuring that we continued to serve our core Hobby consumers who underpin the strength of our brands in the UK. In addition, we have addressed the supply chain issues that have historically held back the business with the sustained investment in people and strengthening of procurement processes in Hong Kong, where many of our products are manufactured. This leaves the business in an improved position with a leaner operating structure, an ERP system which is helping us to drive improved control, and a supply chain from factory to consumer that has real capability to be scaled as necessary.

In Europe trading was severely impacted by problems with the supply of international model rail for much of the first half of the financial year. The European operating model was streamlined during the year with the supply and logistics now being provided through the UK infrastructure at Hersden, by a third party provider. The new business plan will focus sales on its strong and profitable brands and as a result I expect the International business will emerge much stronger and will begin to show sustained trading improvement.

Given the challenges we have faced and the resulting disappointing financial performance this year we have undertaken and completed a comprehensive review of the business led by Steve Cooke. This has led to the development of a clear plan to turnaround the business, to move it back to a position of sustainable profit and cash generation and to identify the necessary investment required. This will result in a smaller, more focused business concentrated on our major UK brands and a streamlined European operating model which will be run out of the UK. The plan will be implemented during the course of 2016 and I expect to see the impact of the plan from early 2017.

To underpin this plan and to enable the Group to move forwards with the appropriate financing structure in place, we have approached investors to raise additional equity funding of £8 million and have also signed a new three-and-a-half year, £10 million facility with the Group's bankers, which is subject to the completion of the equity raise.

I am delighted that we are able to announce today the successful conclusion of these discussions with investors and that the proposed equity raise, which will be put to our shareholders on 8 July 2016. I am highly confident that our shareholders will approve the placing but would draw to your attention the fact that if they are not approved there are serious concerns over the Group's ability to continue as a going concern. The fact that the placing is yet to be approved by shareholders represents a material uncertainty and more detail can be found in the Going Concern paragraphs in the other statements below.

Board Changes

On 15 February 2016, we announced that Richard Ames would be stepping down as Chief Executive and leaving the business. I took up the role of Executive Chairman with immediate effect ahead of a permanent appointment. Further to the announcement on 26 April 2016, I have agreed with the Board to remain Executive Chairman at least until the end of the transition period of the new business plan.

On 26 April 2016, we announced that Group Finance Director, Steve Cooke, was appointed Chief Executive. Steve joined the business in June 2015 and has been making a significant contribution as we continue to make progress with our strategy to drive the Group's turnaround.

On 26 May 2016, the Company announced that David Mulligan had been appointed Interim Group Finance Director. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc and has a successful track record of working with companies undergoing change.

Following completion of the transaction, the Board intends to immediately begin the process of identifying an additional Non-Executive Director, to further strengthen the Board and to ensure that it remains suitable for the Company's purposes.

Shareholder engagement

We will hold our AGM this summer and this will be an excellent opportunity for shareholders to hear more about the new business plan. Personally I am looking forward to welcoming as many shareholders as possible that are able to attend.

I am confident that under Steve's leadership, the Group has the people and plan to build on the foundations for recovery that we have put in place over the last 2 years and to return the business to sustainable profit and cash generation. Once we have completed the changes demanded by the new plan this year, the business will be in a position to grow and succeed into the medium term.

Roger Canham

Executive Chairman

22 June 2016

Chief Executive's Report

Strategic Review

The recent strategic review identified core parts of the business that are stable and profitable driven by iconic brands.  However, fundamental change is required in other areas to deliver sustainable profit and cash generation. Hornby now has in place a clear plan focused on a smaller number of product lines and streamlined operations which will deliver this change. Pages 4 to 11 set out the strategic report for the business.

Business Model and Strategy

The Group's principal business is the design, development, production and supply of hobby and toy products. The Group distributes its products through a network of specialists through its online activities and multiple retailers throughout the UK and overseas.

Review and Turnaround Plan

Last year was difficult and disappointing for Hornby as the business faced into significant challenges during the continued turnaround and improvement of the business. We were pleased with the progress made in modernising product sourcing, improving management of the supply chain, upgrading the logistics, warehousing, stock control processes and accelerating the distribution routes to customers.  We also successfully rolled out a new enterprise resource planning (ERP) system although there were some major early implementation issues. However, these changes, together with a difficult restructuring of the European businesses resulted in substantial unplanned disruption which had a significant adverse impact on trading performance. The resulting underlying loss for the year of £5.7 million, though in line with the Board's revised expectations, was extremely disappointing. All of our recent attention has been focused on analysing the cause of this underperformance and on creating a new plan for the business to turnaround its fortunes.

Thorough review and new business plan

The Board has now completed a thorough review of the business' operations, including its brands, product lines, distribution channels and territories.  The review has identified that many core parts of the business are stable, profitable and cash generative, driven by iconic brands with strong market positions.  The review has also identified areas of the business that require fundamental change to deliver sustainable profit and cash generation.

The Board intends to refocus the business on existing profitable and cash generative products, channels and geographies. This is expected to result in a contraction of revenue as the number of products, brands and channels are reduced. The Board intends to reduce the cost base of the business to reflect projected revenue and a simplified overall business model.  The recent implementation of the ERP system is now complete and is expected to facilitate operational improvements through access to better quality management information.

The new business plan is intended to return the business to sustainable profitability and cash generation through the following key steps:

Reduce business scale and costs

The Group intends to focus on the most profitable and cash generative areas of the business and to make significant cost savings. As a result, it expects to reduce revenue by approximately a quarter.

Maintain key UK brands

All key UK brands will be retained.  The Group owns a number of highly recognisable and profitable brands (Hornby, Scalextric, Airfix, Humbrol and Corgi), which are core to the Group's future strategy. The Group sells products into both the Hobby Market and Toy Market. The new business plan will be strongly focused on improving service to core Hobby customers, especially through the Independent sales channel.

Streamline European operating model and brands

The Group intends to refocus its European business on its most profitable European model rail brands. This will allow the business to maintain a strong market position in international model rail. In addition, operations and product development will be centralised in the UK, resulting in a significant reduction in the cost base of the European business.  The Group intends to retain its US business given its historic profitability and future growth potential.

Focused product range

Over recent years the product range of the business has expanded significantly. The Board now intends to reduce the number of individual product lines by approximately 40 per cent. during the 2016 calendar year, focusing on products which generate higher gross margins. This will reduce business complexity and activity levels which will then allow the cost base to be reduced.  In the financial year ended 31 March 2016, approximately 50 per cent of the business' product lines contributed approximately 90 per cent. of the gross margin. Even after the planned reduction, the Group will be actively managing approximately 1,400 product lines in the 2017/18 financial year. The product range will be streamlined further in 2017, while continuing to release innovative new products to the market.

Refine channel strategy and exit concessions:

In the UK the Group intends to exit a majority of its concession arrangements as it looks to focus on profitable channels to market and improve its customer service.  The Board has been pleased with the growing profitability of its independent and internet distribution channels and in particular intends to support and build on the success of the independent channel. The Company's online sales increased by 39 per cent. compound annual growth rate between 2013 and 2015 and the Company is keen to improve upon this.

Careful management of stock

The failure to meet sales expectations in the 2015/16 financial year combined with the forthcoming rationalisation of the product range, exit of the concessions channel and contraction of the European business has resulted in a higher than necessary level of stock.  The plan is to reduce this in a staged and managed way during the coming year, which will result in cash generation and stock returning to more normal levels.

Implementation of the new business plan is expected to give rise to restructuring costs in the current financial year of approximately £1.7 million across the Group's UK and European operations.  Implementation of any changes to the business and product lines will be phased and structured to minimise disruption to the core business.

In the short term, after a period of transition in 2016, the Board expects the new business plan to result in a modest improvement in gross margin in 2017/18 (driven only by the improved mix effect of the product range rationalisation), with variable costs to reduce significantly.  Once implemented, the new business plan for 2017/18 is estimated to result in an approximately 33 per cent reduction in fixed costs.  Focusing on a reduced number of product lines is expected to reduce the Company's capital expenditure, with a consequent significant positive impact on its cash generation (EBITDA less capital expenditure).  In the medium term, the new business plan targets modest revenue growth, a stabilisation of gross margin and EBITDA improvement driven by operational gearing. Combined with a stable level of capital expenditure this is expected to result in improved cash generation.

Our brands

The start of the year saw James May proclaim the Corgi "Goldfinger DB5" his 'car of the century' and we celebrated this accolade by re-releasing the model for a new generation of customers. To complement this a dedicated "SPECTRE" DB10 and a DB5/DB10 twin-pack was issued alongside the Scalextric "SPECTRE" set, incorporating replicas of the iconic Aston Martin DB10 and Jaguar C-X75, linked to the launch of the latest James Bond film, which capitalised on the interest surrounding the new James Bond film.

Another highlight of the year was the significant public interest and press coverage of the Flying Scotsman's inaugural journey from Kings Cross to York in February, which helped drive sales of Hornby's "The Flying Scotsman" set. Notable Airfix releases during the year included the 1:72 scale Westland Sea King Helicopter and the Quickbuild range (aimed at children and requiring no paint or glue), which added 3 new Hypercars (the Bugatti Veyron, Lamborghini Aventador and McLaren P1) to its lineup.

In Europe, the year also saw strong sales of new lines across the Arnold, Jouef and Rivarossi brands.

Our people

The quality of our product and strength of our brands is due to the passion and commitment of Hornby's talented people. We have continued to attract talented people to the business and have a strong team in place. However, the changes demanded by the new business plan include significant cost reductions and these will inevitably impact people. We will deal with these challenges in a professional and sensitive manner and I am confident that we will be able to able to build a stronger and profitable company which will then be in a position to continue to provide high quality products and service to its customers.

Outlook for 16/17 and Current Trading

The outlook for the medium term is underpinned by the new equity and debt proposals that are announced today, which we trust will be approved by our shareholders on 8 July 2016. Without the successful conclusion of these funding plans, the new business plan will not be deliverable.

The remainder of the 2016/17 financial year will be a period of transition for the Company as we reshape and streamline the business to deliver the plans outlined above. The year will include the various impacts of refocusing the business including an initial period running with a cost base which is too high, the costs of restructuring and the financial impact of stock reduction, which is expected to result in cash generation and a reduction of stock to normal levels.

For the 10 weeks to 12 June 2016 the group delivered total year on year sales growth of 6%. This has been driven largely by the UK, underpinned by the stock reduction programme, and the US. The European businesses are trading broadly in line with last year. This level of performance is in line with our expectations and the new business plan. Group net debt as at 12 June 2016 was approximately £8.1 million.

At this early stage, the Board considers the transition to the new plan is progressing well. As a result, the Board is confident that the new business plan can be delivered successfully and that Hornby can return to being a profitable and cash generative business which will progress to delivering shareholder value in the medium term.

Steve Cooke

Chief Executive

22 June 2016

Operating and Financial Review of the Year

Financial Review

* Stated before amortisation of intangibles (brands and customer lists), net unrealised foreign exchange movements on intercompany loans, and exceptional items.

Performance

Consolidated revenue for the year ended 31 March 2016 was £55.8 million, a decrease of 4% compared to the previous year's £58.1 million. Full year gross profit margin was lower, as expected, at 39% (2015: 47%) as a result of the planned clearance of old stock especially within the European subsidiaries and due to a change in the mix towards lower margin racing sets. In addition, there was also a lack of new, high margin European train stock because of the supply chain problems during the year.

Underlying overheads increased year-on-year by 8% in line with an expected increase in volumes and also due to the increase in distribution costs following the disruption to trading during the year and planned duplication of operational running costs. The new warehouse at Hersden was fully operational during the first half of the year but the various international warehouse operations were also still running during the year. Foreign exchange gains on trading transactions in the year totalled £0.8 million compared to losses of £0.2 million in the previous year. Sales and marketing costs increased by £0.3 million due to increased spend on TV advertising and market research.

Pre-tax loss before net foreign exchange movements on intercompany loans, amortisation of intangible brands, restructuring costs, implementation of the new ERP system, refinancing costs, profit on disposal of property, impairment of tooling and impairment of goodwill (hereafter referred to as underlying (loss)/profit before taxation) was (£5.7) million (2015: profit of £1.6 million) (see reconciliation in note 1). Basic (loss) / earnings per share calculated on underlying (loss)/profit before taxation (hereafter referred to as underlying basic (loss)/earnings per share) were (13.02p) (2015: 3.38p).

A total of £7.9 million (2015: £1.8 million) of costs in these accounts have been identified as outside our definition of the measure of underlying profit as can be seen in note 1. These costs in the year included the net foreign exchange impact on intercompany loans (gain of £0.4 million), amortisation of intangibles (£0.4 million) and exceptional items totalling £7.9 million. Of this total £5.1 million (2015: £1.0 million) was the amortisation of intangible assets, the revaluation of intercompany loans, impairment of goodwill and impairment of tooling all of which are non-cash costs.

The exceptional items totalling £7.9 million (2015: £0.8 million) include restructuring costs (£1.0 million) relating to the reorganisation of the European management teams and the costs of running the Margate site, impairment of goodwill (£4.0 million) following the decision to restructure the European businesses, impairment of tooling (£1.1 million) following the decision to discontinue certain product lines as part of the new business plan outlined in the CEO report, costs relating to the implementation of the new ERP system (£1.2 million), costs relating to the 2015 equity issue and bank refinancing (£0.8 million) less the profit on the sale of part of the Margate site (£0.2 million).

Reported pre-tax loss was £13.5 million (2015: loss of £0.2 million) and reported basic loss per share was (27.87p) (2015: 0.31p loss per share). The income tax charge for the year £0.2 million (2015: £0.1 million credit) arises mainly due to prior year adjustments to deferred tax.

Segmental analysis

Third party sales by the UK business grew by 3% in the year and generated an underlying loss of £2.1 million compared to £1.6 million profit last year. Sales during the summer of 2015 were disrupted by the implementation of the new ERP system. Trading was then strong during the key Christmas season but weakened dramatically into the New Year. The International businesses sales fell by 21% in the year and generated an underlying loss of £3.6 million. Trading was severely impacted by problems with the supply of international model rail for much of the first half of the financial year and by the streamlining of supply and logistics.

Balance sheet

Group inventories increased during the year by 9% from £12.5 million to £13.6 million due to the overhang of stock from the overall sales shortfall against expectations during the year. Trade and other receivables increased by 26% due to some large sales orders being fulfilled just before year end, with a fall post the year end to £9.8 million at the end of April (2015: £8.2 million). Trade and other payables reduced by £1.7 million largely due to a year on year reduction of stock purchases in the first calendar quarter of 2016. The net effect of these factors was an increase in working capital requirements by £5.6 million (an increase of 41%). Investment in new tooling, new computer software and other capital expenditure was £4.6 million (2015: £5.1 million).

Capital structure

On 12 August 2015, Hornby's ordinary shares of 1 pence each were admitted to trading on AIM. The ordinary shares were removed from trading on the Main Market of London Stock Exchange plc and their listing on the Official List was cancelled. The placing, which was announced on 18 June 2015, raised net funds of £14.2 million.

The funds raised in 2015 have been utilised by the investment in new product tooling, the development of the new ERP system and disappointingly by the cash losses sustained during the year and by the increased working capital requirement.

There was a decrease in net debt at 31 March 2016 to £7.2 million, from £7.5 million at 31 March 2015.

Dividend

The challenges facing the business during the past 12 months have been significant and consequently trading has been impacted. Therefore, the decision has again been taken not to pay a dividend (2015: 0.0p). The Board continues to keep the dividend policy under review.

Banking facilities

At 31 March 2016 the Group had in place a revolving credit facility of £10 million expiring August 2019.

The Group has today announced a proposed placing and open offer of £8 million. Subject to completion of the proposed equity fundraising, the company has agreed with its main lender, Barclays Bank Plc, to refinance and extend its existing banking facilities with a £10 million revolving credit facility. The new facility will mature on 31 December 2019 and is expected to allow sufficient headroom for trading working capital and capital expenditure needs through to such date. The new facility has a margin of 3.5% over LIBOR and is subject to commitment and utilisation fees dependent on the level of drawings under the facility.

As is customary the facility is subject to financial covenants, which the Group must comply with and which are to be tested quarterly. For the duration of the transition period of the Group's new business plan through to December 2017, such financial covenants shall comprise a minimum EBITDA test and a current asset (stock and receivables) to net debt test.  Thereafter, the financial covenants shall revert to customary leverage and interest cover financial covenants.

Borrowings in the year ended 31 March 2016 peaked towards the start of the year under the previous bank facility at £12.9 million. Since August 2015 the Company has operated within its new facility limit of £10 million.

Property Update

During the year part of the former head office and warehouse site was sold for a consideration of £0.4 million. We are currently in discussions with a potential purchaser regarding the sale of the remainder of the Margate site. The Hornby Visitor Centre remains located on the main part of the site and will require relocation.

In addition, post the year-end, we completed the sale of office premises in Spain for of consideration of €1.3 million.

Going Concern

The Group's turnaround plan requires additional investment, so the Group are proposing to raise £8 million of additional equity to enable Management to pursue this plan.

The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group's bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016.

The Group has prepared cash flow forecasts on the basis of the additional equity raise and new facility and after detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

However, as the current fundraise has not yet been approved by shareholders prior to approval of these financial statements there remains a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

OUR KEY PERFORMANCE INDICATORS ('KPIs')

The Directors are of the opinion that the financial KPIs are revenues, gross margins, underlying (loss)/profit before tax, (loss)/earnings per share and cash generation, the information for which is available in these financial statements and summarised on the financial highlights section earlier in this report. In light of the work currently being undertaken on the new business plan, management will put in place additional KPIs to monitor progress on the key elements of the plan, which are considered fundamental to performance during the transition period. The Board monitors progress against plan on a regular basis adjusting future objectives annually in line with current circumstances.

IDENTIFICATION OF PRINCIPAL RISKS AND UNCERTAINTIES

The Board has the primary responsibility for identifying the major risks facing the Group and developing appropriate policies to manage those risks. The Board completes an annual risk assessment programme in order to identify the major risks and has reviewed and determined any mitigating actions required as set out below. The risk assessment has been completed in the context of the overall strategic objectives and the new business plan of the Group which has been set out on pages 4 to 6.

Principal risks and uncertainties

Main control procedures

Management establishes control policies and procedures in response to each of the key risks identified. Control procedures operate to ensure the integrity of the Group's financial statements, and are designed to meet the Group's requirements and both financial and operational risks identified in each area of the business. Control procedures are documented where appropriate and reviewed by management and the Board on an ongoing basis to ensure control weaknesses are mitigated.

Ordinarily, the Group operates a comprehensive annual planning and budgeting system. The annual plans and budgets are approved by the Board. The Board reviews the management accounts at its monthly meetings and financial forecasts are updated monthly and quarterly. Performance against budget is monitored and where any significant deviations are identified appropriate action is taken. Given the recent challenges the Group has faced the budget for the current financial year has recently been finalised to reflect the targets in the new business plan.

David Mulligan

Group Finance Director

22 June 2016

Directors and Corporate Information

Directors             

S Cooke

Chief Executive

R Canham

Executive Chairman           

D Mulligan

Group Finance Director

D Adams

Non-Executive Director

C Caminada

Non-Executive Director

Company Secretary

A Stacey

Registered office

3rd Floor The Gateway

Innovation Way

Discovery Park

Sandwich

Kent CT13 9FF

Company Registered Number

Registered in England Number: 01547390

Independent Auditors

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

The Portland Building

25 High Street

Crawley

West Sussex RH10 1BG

Solicitors

Berwin Leighton Paisner LLP

Adelaide House

London Bridge

London EC4R 9HA

Principal Bankers

Barclays Bank PLC

9 St George's Street

Canterbury

Kent CT1 2JX

Financial Advisers and Brokers

Numis Securities Limited

The London Stock Exchange Building

10 Paternoster Square

London EC4M 7LT

Registrars and Transfer Agents

Capita Registrars Limited

The Registry

34 Beckenham Road

Beckenham

Kent BR3 4TU

Directors' Report

The Directors present their Annual Report together with the audited consolidated and Company financial statements for the year ended 31 March 2016.

The Group's business review along with future developments and the principal risks and uncertainties facing the Group are included in the Strategic review.

Principal activities

The Company is a holding company registered in England No. 01547390 with a Spanish branch and has six operating subsidiaries: Hornby Hobbies Limited in the United Kingdom with a branch in Hong Kong, Hornby America Inc. in the US, Hornby Espana S.A. in Spain, Hornby Italia s.r.l in Italy, Hornby France S.A.S in France and Hornby Deutschland GmbH in Germany. Hornby Plc is a public limited company which is listed on the Alternative Investment Market ("AIM"), and incorporated and operating in the United Kingdom. Its registered office is set out on page 12.

The Group is principally engaged in the development, design, sourcing and distribution of hobby and interactive products.

Results and dividends

The results for the year ended 31 March 2016 are set out in the Group Statement of Comprehensive Income on page 21. Revenue for the year was £55.8 million compared to £58.1 million last year. The loss for the year attributable to equity holders amounted to £13.7 million (2015: £0.1 million loss). The position of the Group and Company is set out in the Group and Company Balance Sheets on page 22. Future developments are set out within the CEO report within the outlook paragraph on page 6.

No interim dividend was declared in the year (2015: £nil) and the Directors do not recommend a final dividend (2015: £nil).

Going Concern

The Group's turnaround plan requires additional investment, so the Group are proposing to raise £8 million additional equity to enable Management to pursue this plan.

The Directors have approached both existing and potential new investors to raise the additional equity funding of £8 million and have also signed a new facility with the Group's bankers through to December 2019, which is conditional on the £8 million equity raise. After the discussions with existing investors, the Directors have a high degree of confidence that the fundraise will be approved by shareholders and therefore the new working capital facility will become available. However, this equity raise is subject to shareholder approval on 8 July 2016.

The Group has prepared three-year cash flow forecasts on the basis of the additional equity raise and new facility and after detailed review of these forecasts and cash flow models with external advisors, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

However, as the current fundraise has not yet been approved by shareholders there remains a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not raise funds as expected, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

Research and development

The Board considers that research and development into products continues to play an important role in the Group's success. All R&D costs incurred in the year have been charged to the Statement of Comprehensive Income and are set out in note 4, these costs all relate to research costs.

Directors

The persons who were Directors during the year and up to the date of signing the financial statements are listed below:

Steve Cooke, aged 50, joined the Board on 13 July 2015 as Finance Director and on 26 April 2016 was appointed Chief Executive. Steve has significant financial and general management experience in both PLC and private environments. Previously, he was Finance Director at LSL Property Services PLC, COO at Bestinvest, CFO at Mapeley and CFO at Energis, where he was part of the successful turnaround team. Having qualified with Coopers & Lybrand Steve was a strategy consultant with OC&C before spending time in senior financial and general management roles at Sainsbury's, Homebase and B&Q.

David Mulligan, aged 46, was appointed to the board on 25 May 2016. David was formerly Group Finance Director at construction and regeneration company Morgan Sindall Group plc.  Most recently he was Municipal FD at Shanks Group plc.  Prior to this he worked at Smiths Group plc and trained as a chartered accountant at Ernst & Young.

Roger Canham, aged 50, was appointed to the Board on 7 November 2012 and became Chairman on 1 February 2013. Roger has been Chairman of Phoenix Asset Management Partners Limited ('Phoenix') since 2009 and also owns and manages a number of property development companies. Prior to that, he was a Non-Executive Director of Goshawk Insurance Holdings PLC from 2007 until the business was acquired in 2008, and a Director of Brake Bros Limited, for a year following its acquisition of W. Pauley & Co Limited in 2002. Mr Canham joined W. Pauley & Co Limited in 1990 and became Managing Director in 1996.

David Adams, aged 61, was appointed a Non-executive Director on 9 January 2014. David is currently senior Non-Executive Director of Halfords plc and chairs Conviviality Retail plc, Ecovision Ltd, Park Cameras Ltd, and Walk the walk (a breast cancer charity). In addition, he is a Non-Executive Director of Fever-Tree Drinks plc. David chairs the audit committee at Halfords and Fever-Tree Drinks. Prior to that he was Executive Chairman of Jessops and Chief Financial officer and Deputy Chief Executive officer at House of Fraser plc.

Charlie Caminada, aged 57, was appointed a Non-Executive Director on 9 January 2014. Charlie was previously Chief Operating Officer of HIT Entertainment Plc, which is now part of Mattel. His most recent position was the Founder and Chief Operating Officer of Ludorum, a media investment company that focused on managing IP franchises for children's entertainment brands, including Chuggington. Charlie led the company's IPO on AIM in 2006. He is a Non-Executive Director of Shoe Zone Plc and chairs the Remuneration Committee at the Company.

Richard Ames, aged 44, was appointed to the Board on 28 April 2014. Richard resigned on 12 February 2016.

Nick Stone, aged 51, joined the Group on 14 January 2013 and was appointed Group Finance Director on 1 February 2013. Nick Stone left Hornby in October 2015 and was replaced by Steve Cooke who joined the business on 10 June 2015.

The interests of the Directors in the shares of the Company and in options granted over such shares are disclosed later in this Report.

Directors' indemnities

The Company maintained liability insurance for its Directors and officers during the financial year and up to the date of approval of the Annual Report and Accounts. The Company has also provided an indemnity for its Directors and the secretary, which is a qualifying third party indemnity provision for the purposes of the Companies Act 2006.

Substantial shareholdings

The Company has been notified that at close of business on 17 June 2016 the following parties were interested in 3% or more of the Company's ordinary share capital.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the Annual Report and accounts in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the Company and Group for that period.  In preparing these financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and accounting estimates that are reasonable and prudent

·      state whether applicable IFRSs as adopted by the European Union 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 company and the group will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and 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 2006. 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.

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Disclosure of information to auditors

In the case of each director in office at the date the directors' report is approved, that:

(a) so far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and

(b) he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information.

Financial instruments

The Group's financial instruments, other than derivatives, comprise borrowings, cash and liquid resources, and various items, such as trade receivables, trade payables, etc. that arise directly from its operations. The Group's financial liabilities comprise borrowings, trade payables, other payables and finance leases. The main purpose of the Group's borrowings is to raise finance for the Group's operations. The Group also has financial assets comprising cash and trade and other receivables.

The Group also enters into derivatives transactions (principally forward foreign currency contracts). The purpose of such transactions is to manage the currency risks arising from the Group's operations. It is, and has been throughout the period under review, the Group's policy that no speculative trading in financial instruments shall be undertaken.

FINANCIAL RISK MANAGEMENT

The financial risk is managed by the Group and more information on this can be found within the Notes to the financial statements on page 30.

Personnel policies

It is the policy of the Group to follow equal opportunity employment practices and these include the full consideration of employment prospects for the disabled.

Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. Arrangements are made, wherever possible, for retraining employees who become disabled, to enable them to perform work identified as appropriate to their aptitudes.

The Group places importance on the contributions to be made by all employees to the progress of the Group and aims to keep them informed by the use of formal and informal meetings. One of the Company's incentive schemes includes share scheme options for Directors and senior management, further detail of which is covered later in this Report.

Share capital

The share capital of the Company comprises ordinary shares of 1p each. Each share carries the right to one vote at general meetings of the Company. The issued share capital of the Company, together with movements in the Company's issued share capital is shown in note 21.

Independent auditors

A resolution to reappoint the auditors, PricewaterhouseCoopers LLP, will be proposed at the forthcoming Annual General Meeting.

Annual General Meeting

The Annual General Meeting is to be scheduled for Summer 2016. A notice of the Annual General Meeting will be sent out to shareholders separately to this Annual Report and Accounts. The notice of the Annual General Meeting is important and requires your immediate attention. If you are in any doubt as to what action to take in relation to the Annual General Meeting, you should consult appropriate independent advisers.

DIRECTORS' REMUNERATION

Executive Directors' base salaries are reviewed annually by the Committee taking into account the responsibilities, skills and experience of each individual, pay and employment conditions within the Company and salary levels within listed companies of a similar size.

The following table summarises the total salary and pension contributions received by Directors for 2015-16 and 2014-15 in line with the Companies Act 2006 requirement:

* - included within the basic salary and fees is compensation for loss of office totalling £96,000

** - included within the basic salary and fees is compensation for loss of office totalling £36,000

Performance Share Plan awards outstanding

At 31 March 2016, outstanding awards to Directors under the Performance Share Plan were as follows:

For the 2013 awards, 40% of an award is subject to a TSR condition and 60% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby's TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points.  For the EPS part of the award, 25% vests for average annual underlying EPS growth of RPI+3% p.a., with full vesting for average annual EPS growth of RPI+12% p.a. A sliding scale operates between these points

For the 2014 awards, 40% of an award is subject to a TSR condition and 60% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby's TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points. For the EPS part of the award, 25% vests for EPS of 5p for the year ending 31 March 2016, with full vesting for EPS of 12.2p for the year ending 31 March 2017 with a sliding scale operating between these points.

For the 2015 awards, 40% of an award is subject to a TSR condition and 60% is subject to an EPS performance condition, both of which are measured over a period of three financial years. For the TSR condition, 25% of this part of the award will vest if Hornby's TSR is equal to the TSR of the median company of the constituents of the FTSE Small Cap (struck at the date of grant), with full vesting for top quartile performance, with a sliding scale operating between these points.

Benefits and Pension

Policies concerning benefits, including the Group's company car policy, are reviewed periodically. Currently, benefits in kind comprise motor cars and private health cover, both of which are non-performance related. The Executive Directors and senior managers are members of defined contribution pension schemes and annual contributions are calculated by reference to base salaries, with neither annual bonuses nor awards under the share incentive schemes taken into account in calculating the amounts due. The contribution level continues to be 20% of base salary for Executive Directors.

Executive Directors' service contracts

The Executive Directors do not have fixed period contracts.

Payments to Past Directors, Policy on payment of loss of office and termination payments

No payments were made to past Directors in the year ended 31 March 2016. Notice periods are set under individual service contracts but the Company has a policy for Executive directors of a notice period of six months to be given by the Company which is extended to one year after six months' service and of six months to be given by the individual. The compensation for loss of office is based upon the respective service contracts and the components are based on the base salary of the director. IFRS 2 leaver provisions are applied to the PSP share scheme based upon the Directors' service contracts.

DIRECTORS' INTERESTS

Interests in shares

The interests of the Directors in the shares of the Company at 31 March 2016 were:

All the interests detailed above are beneficial. Apart from the interests disclosed above no Directors were interested at any time in the year in the share capital of any other Group company. Roger Canham is also the chairman of Phoenix Asset Management Partners who hold a substantial shareholding in Hornby Plc.

On behalf of the Board

David Mulligan

Group Finance Director

3rd Floor The Gateway

Innovation Way

Discovery Park

Sandwich

Kent CT13 9FF

22 June 2016

Independent auditors' report to the members of Hornby Plc