Top Ten Holdings Plc

5 August 2008

Results for the year ending 30th March 2008

• Smoking ban and Gambling Act restrictions impact on industry;

• Pre-tax loss of £8.85 million (2007 Profit £2.51 million);

• Impairment charge of £7.0 million, other non-recurring items of £850,000;

• Cost reductions have been achieved in excess of £1.25 million per annum;

• Group remains cash generative;

• Net asset value per share, after significant impairments, is 41p. 

CHAIRMAN'S STATEMENT

Introduction

The results for the 52 week period ended 30th March 2008, with revenues down from £30 million to £25 million and a loss before tax, non-recurring items and impairment charges of £1.0 million compared to £2.7 million of profit last year, reflect the very challenging environment in which the Group operated during this period.

The smoking ban, which came into effect in Wales on 2 April 2007 and on 1 July 2007 in England, has had a much greater adverse effect on the bingo industry in England and Wales than had been anticipated based on the earlier experience in Scotland. This was compounded by the changes in the Gambling laws in September 2007 and, in particular, by the removal of "Section 21" fruit machines from use in licensed bingo clubs.

Whilst as an industry Bingo is usually resilient in the face of economic adversity the impact of the current economic conditions and the strong rise in food and fuel prices has undoubtedly hit the spending capacity of our customers.

 Results

Revenue was £25.8 million (2007 £30.6m) and the Group made a pre-tax loss of £8.85 million (2007 £2.51m profit) after non-recurring items and impairment charges of £7.85 million (2007 £166,000). Earnings per share, before non-recurring items, amounts to nil (2007 7.0p ). The accounts for 2007 have been restated for IFRS accounting rules, which has resulted in the balance sheet showing an increased provision for deferred tax compared to the figures reported last year.

Non-recurring items relate to profits on property disposals, the costs associated with new banking facilities and impairment charges. During the year the Group disposed of three smaller or less profitable sites which resulted in a profit on asset sales of £432,000. Additionally, following the agreement of new banking facilities, referred to below, the Group expensed the loan arrangement fees of £542,000 relating to its previous facilities as non-recurring financing costs. 

After a total impairment charge of £7.0 million primarily relating to goodwill arising on previous acquisitions, the net asset value per share at 30th  March 2008 decreased to 41p (2007 71p).

The tax credit of £1.87 million includes a deferred tax credit of £1.26 million and a repayment of corporation tax of £615,000 which is due to the Group, following the 2007/8 loss. 

VAT

The industry has lobbied the Chancellor to reduce the double taxation of bingo clubs by the abolition of VAT on Bingo to bring us into line with the rest of the gaming industry.

Both the Bingo Association and Top Ten independently have obtained counsel's opinion that VAT should not under EC law be payable on bingo income. As previously reported we have made claims for some £5.4 million for VAT already paid in respect of bingo income. We have also stopped paying this element of the VAT. There is a separate, outstanding claim (currently the subject of an awaited VAT Tribunal decision) for refund of VAT on fruit machine income amounting to £2.6 million. In total, the Group has therefore lodged refund claims amounting to £8 million.

Since July, 2008, the Group has assumed that interval bingo ("MCB") is VAT exempt resulting in a £0.78 million benefit to the 2008 results. The treatment of MCB as VAT exempt was confirmed in a recent VAT Tribunal decision. In addition, the Group has lodged a claim for the repayment of £3.1 million in respect of the past payment of VAT in relation to MCB. However, this claim is not reflected in the Group's balance sheet at 30th March 2008. A further claim of £2.3 million in respect of VAT on the main bingo game income has also been made, which again is not reflected in the balance sheet at 30th March 2008.

A recent VAT Tribunal decision has explicitly confirmed the position taken by the Group in respect of MCB and (implicitly) in respect of main bingo fees.

HM R & C have appealed against this VAT Tribunal decision (the Rank case) to treat interval bingo income as exempt. Therefore at 30th March 2008 there is a contingent liability of £786,000 which might arise if this VAT were to become payable.

Trading performance

The Group started cutting costs in 2006 in anticipation of the smoking ban but once it became clear that the impact of the smoking ban was going to be much worse than anticipated the Group embarked on a more aggressive cost reduction plan. I am pleased to report that, at the present time, the cost base has been reduced by approximately £1.25 million on an annualised basis. 

During the year, a major refurbishment was completed at our Mansfield site (one of the largest in the Group). In addition, hand-held, electronic bingo terminals have been successfully installed in 9 of our clubs, taking the total number of installed terminals over 500. Further such installations are planned in 2008 /9. 

As we reported last year we have been trying to dispose of under performing sites. During the year we sold Boldon, Mexborough and Goole for £ 976,000 and realised a profit of £432,000.

We have shut Morley, Heckmondwike and Wigston where we have determined that it is cheaper than continuing to operate. 

We appointed advisers to look at the possibility of a Sale and Leaseback of our major sites but, in the current absence of bank lending to the commercial property market, this proposal is not cost-effective. 

Bank Facilities

During the year it became clear that whilst the Group had not breached covenants there was a possibility that this might happen and we worked with The Royal Bank of Scotland to agree new facilities. 

We now have new facilities which last to 2011 and comprise a £16 Million term loan and a £12.8 mezzanine loan. The interest on the term loan and the Mezzanine loan is 2 per cent. and 9 per cent. over Libor respectively. Of the 9 per cent payable on the mezzanine loan 7 is rolled up until the end of the period. In addition the bank took a warrant to subscribe for 10 per cent of the equity of the Company at a price of 20p per share. The Group incurred professional costs of £184,000 reviewing the banking arrangements and, as set out earlier, expensed loan arrangement fees of £542,000.

Current trading has been affected by the continuing deterioration in the economic climate, which would have resulted in a breach of a banking covenant at June, 2008 had our bankers not waived the covenant. We continue to work with our bankers and the bank has indicated both a willingness to renegotiate future covenants if appropriate and also its continuing support for the business. On this basis, the directors have prepared the accounts to 30 March 2008  on a going concern basis (see Note 1).  

Dividends

The board will not be declaring a dividend.

. 

Staff

Top Ten employs 820 people, who have persevered through a difficult period of re-organisation, with enthusiasm and tenacity. I should like to thank them all for their support.

Outlook

Bingo has historically been robust during times of hardship. The only time that it has been seriously affected was at the introduction of the National Lottery. The combination of rapidly rising food and energy prices and the current economic environment has had a similar effect. The Group remains focussed on rebuilding its profitability to an acceptable level although in the current economic climate this may take several years.

Sir Aubrey Brocklebank

Chairman

Further Information:

Andrew Marshall

Greycoat Communications

Tel: 020 7960 6007

Graham Kerr

Top Ten Holdings plc

Tel :  01727 850 793 

Consolidated income statement (unaudited)

for the period ended 30 March 2008

	Note	52 weeks ended 30 March 2008			53 weeks ended 1 April 2007
		Before			Before
		non-	Non-		non-	Non-
		recurring	recurring	Total	recurring	recurring	Total
		£000	£000	£000	£000	£000	£000
Revenue	2	25,829	-	25,829	30,579	-	30,579
Cost of sales		(4,085)	-	(4,085)	(4,922)	-	(4,922)
Gross profit		21,744	-	21,744	25,657	-	25,657
Other operating income	4	-	432	432	-	194	194
Operating costs		(17,603)	(7,740)	(25,343)	(18,532)	(360)	(18,892)
Administrative expenses		(2,949)	-	(2,949)	(2,342)	-	(2,342)
Operating profit/(loss)		1,192	(7,308)	(6,116)	4,783	(166)	4,617
Financial income	3	-	-	-	17	-	17
Financial expenses	3	(2,194)	(542)	(2,736)	(2,126)	-	(2,126)
Net financing expense		(2,194)	(542)	(2,736)	(2,109)	-	(2,109)
(Loss)/profit before tax		(1,002)	(7,850)	(8,852)	2,674	(166)	2,508
Taxation	5	918	957	1,875	(650)	50	(600)
(Loss)/profit for the period		(84)	(6,893)	(6,977)	2,024	(116)	1,908
(Loss)/profit per share - Pence	7			(27p)			7p

Consolidated balance sheet (unaudited)

as at 30 March 2008

		Note			Group
					2008	2007
					£000	£000
Non-current assets
Property, plant and equipment					22,451	25,135
Intangible assets					11,457	16,889
Other financial assets					-	401
Other non-current assets					10,837	11,418
					44,745	53,843
Current assets
Inventories					447	488
Trade and other receivables					584	750
Cash and cash equivalents					1,319	1,645
Assets classified as held for resale					324	-
Tax repayment					615	-
					3,289	2,883
Total assets					48,034	56,726
Current liabilities
Interest bearing loans and borrowings		8			(1,798)	(619)
Trade and other payables					(3,382)	(2,818)
Tax payable					-	(308)
Other financial liabilities					(81)	-
					(5,261)	(3,745)
Non-current liabilities
Interest-bearing loans and borrowings		8			(27,624)	(28,935)
Provisions					(80)	-
Deferred tax liabilities					(4,495)	(5,904)
					(32,199)	(34,839)
Total liabilities					(37,460)	(38,584)
Net assets					10,574	18,142
Equity attributable to equity holders of the parent
Share capital					5,101	5,101
	Share premium				8,879	8,879
	Other reserves				(58)	280
	Retained earnings				(3,348)	3,882
	Total equity				10,574	18,142

Group cash flow statement (unaudited)

for the period ended 30 March 2008

				52 weeks to	53 weeks to
				30 Mar 08	1 Apr 07
				£000	£000
Cash flows from operating activities
(Loss)/profit for the period				(6,977)	1,908
Adjustments for:
Depreciation, amortisation and impairment				9,037	1,669
Financial income				-	(17)
Financial expense				2,736	2,126
Gain on sale of property, plant and equipment				(432)	(194)
Taxation				(1,875)	600
				2,489	6,092
Decrease/(increase) in trade and other receivables				166	177
Decrease/(increase) in inventories				41	(64)
Increase/(decrease) in trade and other payables				504	419
Increase in provisions and employee benefits				80	-
				3,280	6,624
Tax paid				(622)	(640)
Net cash from operating activities				2,658	5,984
Cash flows from investing activities
Proceeds from sale of property, plant and equipment				1,102	677
Interest received				-	17
Acquisition of subsidiary, net of cash acquired				-	(871)
Acquisition of property, plant and equipment				(1,314)	(1,943)
Net cash from investing activities				(212)	(2,120)
Cash flows from financing activities
Proceeds from new loan				-	900
Interest paid				(2,194)	(2,126)
Repayment of borrowings				-	(2,121)
Repayment of finance lease liabilities				(323)	(224)
Dividends paid				(255)	(367)
Net cash from financing activities				(2,772)	(3,938)
Net decrease in cash and cash equivalents				(326)	(74)
Cash and cash equivalents at 1 April				1,645	1,719
Cash and cash equivalents at 30 March				1,319	1,645

Statements of recognised income and expense (unaudited)

For the period ended 30 March 2008

				52 weeks to	53 weeks to
				30 Mar 08	1 Apr 07
				£000	£000
Effective portion of changes in fair value of cash flow hedges				(482)	693
Deferred tax on fair value of cash flow hedges				144	(208)
Net (expense)/income recognised directly in equity				(338)	485
(Loss)/profit for the period				(6,977)	1,908
Total recognised income and expense for the period				(7,315)	2,393

Reconciliation of movement in capital and reserves (unaudited)

	Share	Share	Other	Retained	Total
	capital	premium	reserves	earnings	Equity
	£000	£000	£000	£000	£000
Balance at 27 March 2006	5,065	8,711	(205)	2,337	15,908
Total recognised income and expense	-	-	485	1,908	2,393
Issue of shares	36	168	-	-	204
Equity-settled share based payment transactions	-	-	-	4	4
Dividends	-	-	-	(367)	(367)
Balance at 1 April 2007	5,101	8,879	280	3,882	18,142
Balance at 2 April 2007	5,101	8,879	280	3,882	18,142
Total recognised income and expense	-	-	(338)	(6,977)	(7,315)
Equity-settled share based payment transactions	-	-	-	2	2
Dividends	-	-	-	(255)	(255)
Balance at 30 March 2008	5,101	8,879	(58)	(3,348)	10,574

Notes

1 Basis of preparation

The group financial statements consolidate those of the Company and its subsidiaries (together referred to as the 'Group').

The group financial statements have been prepared and approved by the directors as required by the AIM rules of the London Stock Exchange that require the group financial statements to be prepared in accordance with International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs'). 

The financial statements are prepared on the historical cost basis except for the revaluation of financial instruments.

Going concern

The unaudited results announced today have been prepared on a going concern basis. As set out below, there are material uncertainties which may cast significant doubt over the group's ability to continue as a going concern. If the group is unable to agree facilities (including revised covenants) which meet its future cashflow requirements then the group may be unable to realise its assets and discharge its liabilities in the normal course of business. We understand that the auditors report in the financial statements will be unqualified but will be modified to include an emphasis of matter regarding the uncertainties concerning going concern described below.  

Background

The directors have prepared future financial forecasts, including cash flow forecasts, for the next twelve months from the date of approval of these financial statements.  As set out within the directors' report the group's performance during 2008 has been adversely affected by the introduction of the smoking ban in England and Wales and the costs and negative impact of the Gambling Act. The group breached one of its covenants in June 2008 and the forecasts, based upon current trading, show that the group may not be able to meet some of the future covenants set out within the banking facilities. Additionally the forecasts include the repayment of £3.1 million in September 2008 for VAT already paid on mechanised cash bingo and assume that income on both mechanised cash bingo and participation fees is VAT exempt. The forecasts exclude any receipt of VAT repayments in respect of participation fee income and fruit machine income. There are significant uncertainties surrounding the treatment of VAT on bingo related income (as set out below) which could significantly affect the future receipts and payments of VAT within the forecast period and would impact the ability of the group to make the forecast capital repayments.

Uncertainty surrounding the treatment of VAT on bingo income 

For some years, the bingo industry has been urging reform of the double taxation (VAT and gross profit tax) on bingo income. The trade association has argued that the tax treatment is not only excessive but unlawful. As a result there is significant uncertainty surrounding the treatment of bingo income and a number of relevant test cases are currently in progress. 

Following the advice of tax counsel, from 1 July 2007 the group has prepared its VAT returns and made VAT payments on the basis that both mechanised cash bingo and participation fees are exempt from VAT.  Additionally the group made claims to HMRC for the repayment of £5.4 million relating to VAT paid on income from mechanised cash bingo and participation fees in earlier periods. The result of a recent VAT tribunal case between HMRC and another bingo operator confirms the group's position regarding mechanised cash bingo and provides support to the position adopted on participation fees. However HMRC have appealed the result of the tribunal, indicated that they do not agree with the group's position and raised a protective assessment.  In addition to the claims for mechanised cash bingo and participation fees the group has an additional claim pending the repayment of £2.6 million relating to VAT on fruit machine income (a VAT Tribunal decision is currently awaited).

Ultimately if HMRC's interpretation of the legislation were proved correct then the group estimate they would have to make the additional VAT payments in relation to both mechanised cash bingo and participation fees of £920,000 for the period to 31 March 2008 plus interest and potentially penalties and approximately £300,000 of additional VAT would be payable on a quarterly basis thereafter. As set out earlier the directors do not believe these amounts are payable and have not included the payments within their cash flow forecasts. The current facilities are not sufficient to make these additional payments if payment were demanded in the forecast period. If the directors were not successful in their claim that participation fees are VAT exempt then their initial analysis shows that a number of games would be VAT exempt under the gambling for small prizes section of the Gambling Act significantly reducing the amounts which would become payable.  

Financial forecasts and bank support

As set out earlier the group breached one of its agreed covenants in June 2008 and the financial forecasts show the group may breach future covenants. Additionally, significant loan repayments within the forecast period are dependant on the receipt of VAT repayments from HMRC and proceeds from the sale of properties. The timing of receipts arising from future property sales and VAT repayments are inherently uncertain. Finally, the forecasts exclude any potential VAT payments for mechanised cash bingo and participation fees if HMRC were ultimately successful in their interpretation of the legislation.  

The bank have waived the covenant breached in June 2008 and indicated their intention to reset future covenants in accordance with the current forecasts. Additionally, the bank recognises the uncertainty surrounding the timing of receipts from both the claims for overpaid VAT and property sales and therefore the potential requirement to restructure the capital repayment profile within the facilities in the future. On this basis the directors consider it appropriate to prepare the financial statements on a going concern basis.  

However, until such time as the new covenants are agreed and the proceeds from the sale of property and repayments of VAT are finalised and received by the group there is material uncertainty which may cast significant doubt over the group's ability to continue as a going concern.  If the group is unable to agree facilities (including revised covenants) which meet its future cashflow requirements then the group may be unable to realise its assets and discharge its liabilities in the normal course of business.  

Other information

The financial information set out above does not constitute the company's statutory accounts for the years ended 30 March 2008 or 1 April 2007. The financial information for 2007 is derived from the statutory accounts for 2007. The auditors have reported on the 2007 accounts; their report was i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The statutory accounts for 2008 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the registrar of companies in due course.

Top Ten Holdings Plc operates in one business segment, being that of a bingo operator and all of the £25.8 million (2007: £30.6 million) revenue is derived from this sector. The various Bingo Clubs are all located in the United Kingdom which is the only geographical segment for the group. Further analysis has not been provided on the grounds that all income and expenses are derived from the same segment.

3              Finance income and expense

Recognised in profit or loss

Included within finance expenses are non-recurring items as follows:

Included within other operating income are non-recurring items as follows:

Included within operating profit are non-recurring items as follows:

Each bingo club has been classified as an independent cash generating unit ('CGU') on the basis that the cash inflows generated are largely independent of the cash inflows of other bingo clubs. 

In accordance with IAS 36 'Impairment' an impairment review has been completed for each separate CGU. The recoverable amount of the goodwill has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by the Board and a growth rate of 0% (2007: 4%). The pre-tax discount rate applied to the cash flow projections is 10.7% (2007: 10.7%). 

 5              Taxation 

Recognised in the income statement

The corporation tax rate decreased from 30% to 28% on 6 April 2008.

The following dividends were recognised during the period:

After the balance sheet date dividends of £nil per qualifying ordinary share (2007: 1p) were proposed by the directors. 

Basic earnings per share

The calculation of basic earnings per share at 30 March 2008 was based on the loss attributable to ordinary shareholders of £6,977,000 (2007: profit of £1,908,000) and a weighted average number of ordinary shares outstanding of 25,505,000 (2007: 25,505,000).

No diluted loss per share has been presented for either the current or the prior year as the share options and warrants do not have a material dilutative effect.

 8              Other interest-bearing loans and borrowings 

This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings, which are measured at amortised cost.  

The annual general meeting will be held on 24th September 2008  at the Holiday Inn, Crick, Northamptonshire NN6 7XR

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